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HAND-BOOK 


FOR 


Bank  Officers 


BY 

Geo.  M.  Coffin, 

AUTHOR   OF 

"Hand-Book  for  National-Bank  Shareholders." 


WASHINGTON,    I).   C, 

H.  L.  McQuKEN,  Publisher. 
189T. 


V y 

Kntered  according  to  a(5l  of  Congress,  in  the  year  iSgi,  by 

Geo.  M.  Coffin, 

In  the  office  of  the  Librarian  of  Congress,  at  Washington,  D.  C. 


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PREFACE 


>'    TN  preparing  this  (the  third)  edition  of  this  work,  some  important 
^    1     additions  have  been  made,  the  chief  of  which  are   the  two   new 
5   chapters  on   the   powers   and   duties   of  the   President  and   Cashier, 
respectively. 

Though  treating  specially  of  the  law  and  practice  governing  National 

^    banks,  the  volume,  as  it  now  stands,  will  be  found  valuable  and  useful 

~    to  the  officers  of  any  commercial  bank,  for  the  reason  that  the  National 

^   banking  system  embodies  the  very  best  features  of  commercial  banking, 

as  is  conclusively  shown  by  the  wonderful  success,  growth  and  strength 

attained  by  it  in  a  period  of  about  twenty-five  years. 

Perhaps  the  best  proof  of  the  merit  of  the  work  is  the  fact  that  it  has 
J     reached  a  third  edition  in  sixteen  month's  time,  a  result  largely  owing 
to  the  commendation  kindly  expressed  by  some  of  the  most  prominent 
and  successful  bankers  in  all  sections  of  the  country. 

January,  iSgi. 


38642*? 


CONXKNXS. 


PART  ONE. 

Lawful-Money  Reserve. 


CHAPTER   I. 

Page. 

Legal  requirements     i 

Required  on  deposits  only 3 

Ivist  of  reserve  cities 3 

Classification  of  banks  with  regard  to  percentage  of  reserve 

required 4 

Various  forms  of  lawful  money  available  for  reserve 5 

Deposits,  and  sundry  items  which  are  allowed  to  offset  deposits  7 

Reciprocal  accounts  with  reserve  agents 8 

Examples  showing  how  reserve  should  be  computed  in  ordi- 
nary cases 9 

Exceptional  cases 12 

Rules  for  finding  exact  excess  with  reserve  agents  and  for  ap- 
plying it  to  reduction  of  liability  on  deposits 12 

Examples  showing  how  reserve  should  be  computed  in  excep- 
tional cases 15*" 

CHAPTER  II. 

Explanation  of  rules  applying  in  exceptional  cases 17 

Explanation  of  case  of  25  per  cent,  reserve  bank 17 

Explanation  of  case  of  15  per  cent,  reserve  bank 19 

Simple  method  of  keeping  the  5  per  cent,  redemption  fund 

account 20 

How  to  compute  average  reserve 22 

Form  of  application  for  Comptroller's  approval  of  reserve  agent  22 


PART  TWO. 


CHAPTER   I. 

ORGANIZATION  OF  NATIONAL  BANKS. 

Minimum  capital  stock  required 24 

Increase  and  reduction  of  capital  stock 24 

Minimum  bond  deposit  requirements 25 


vi  CONTENTS. 

CHAPTER   II.  P^ee- 

QUALIFICATIONS,  DUTIES,  AND  LIABILITIES  OF  DIREC- 
TORS. 

General  information  as  to  duties 27 

How  directors  should  be  chosen 30 

Scope  of  powers  conferred  upon  directors — Specific  duties  .    .      31 
Decisions  as  to  liabilities — What  would  constitute  violation  of 
law  "  knowingly  "  committed  or  permitted 33 

CHAPTER  III. 

BOOKS,  ACCOUNTS,  AND  RECORDS. 

Form  for  daily  statement  of  resources  and  liabilities 41 

CHAPTER  IV. 

GENERAL  BANKING  POWERS  CONFERRED  BY  SECTION 
5136,  PARAGRAPH  7. 

Court  decisions  construing  these 42 

Power  to  borrow  money — Power  to  issue  time  certificates  of 

deposit         45 

Bills  payable  defined 48 

Post-notes  defined 49 

Right  to  deal  in  stocks  and  bonds  denied  by  the  courts   ...  50 

*        Purchasing  commercial  paper 54 

CHAPTER  V. 
TRANSACTIONS  IN  REAL  ESTATE. 

Restrictions  imposed  by  law 57 

Securities  based  on  real  estate  values 59 

Supreme  Court  decisions 61 

CHAPTER  VI. 
RESTRICTIONS  AS  TO  LOANS  IMPOSED  BY  SECTION  5200. 
Examples  illustrating  excessive  loans  and  such  as  are  not 

excessive 64 

Deposits  with  banks  and  bankers  regarded  as  loans 68 

Exceptions  as  to  discounts,  and  examples  illustrating  these  .      69 
Overdrafts  are  loans 72 

CHAPTER  VII. 

RESTRICTIONS  WITH  REGARD  TO  A  BANK'S  ACQUIRING 
AND  HOLDING  ITS  OWN  STOCK. 

Penalty  for  holding  beyond  time  limit 73 


CONTENTS.  Vll 

CHAPTER  VIII. 

EARNINGS,  SURPLUS  AND  DIVIDENDS.  Page. 

Legal  requirements  regarding  net  profits  and  surplus — Bad 

debts  defined 76 

Legal  requirements  with  regard  to  reports  of  dividends  and 

earnings — How  to  make  these  up 78 

Capitalization  of  surplus 80 

CHAPTER  IX. 

REPORTS  OF  CONDITION  REQUIRED  BY  SECTION  521 1. 

Information  with  regard  to  same,  filling  out  schedules     ...  82 

Verification  and  Attestation 86 

How  to  proceed  in  absence  of  three  directors  or  of  both  presi- 
dent and  cashier 87 

Penalty  for  delay  in  forwarding  reports 87 

CHAPTER  X. 

MATTERS  OF  MANAGEMENT  AND  POLICY. 

Overdrafts 89 

Renewing  paper  by  noting  payment  of  interest  on  same  .    .    .  91 

Renewal  of  discounted  commercial  paper 91 

Borrowing  money  on  certificates  of  deposit 92 

CHAPTER   XI. 

DIGEST  OF  NATIONAL-BANK  CASES 93 

CHAPTER  XII. 

THE  PRESIDENT. 

His  powers  and  duties 95 

The  vice-president — powers  and  duties 97 

CHAPTER  XIII. 

THE  CASHIER. 

His  powers  and  duties 98 

CHAPTER   XIV. 

GENERAL  REMARKS,  IN  CONCLUSION,  REGARDING  THE 
NATIONAL-BANK  SYSTEM     105 


Notes. 

Additional  Reserve  Cities. 

On  page  3  of  this  volume  it  is  stated  that  there 
are  nineteen  reserve  cities,  and  on  page  4  a  list  of 
these  cities  is  given.  To  this  list  should  now  be 
added  the  names  of  three  more  which  have  recentl}- 
become  reserve  cities — making  a  total  of  twenty-two 
(22)  reserve  cities  at  present  (December,  1890). 

The  following  is  a  list  of  the  three  cities  referred 

to  and  the  dates  upon  which  they  were  approved 

by  the  Comptroller: 

Minneapolis,  Minn.,  approved  July  5,  1890. 
St.  Paul,  "  "  July  8,  1890. 

Brooklyn,  N.  Y.  "  July  14,  1890. 

Lawful  Money. 

To  the  list  of  various  forms  of  lawful  monej^  on 
page  6  should  now  be  added  U.  S.  Treasury  Notes 
issued  under  act  July  14,  1890,  which  are  also  avail- 
able for  lawful  money  reserve. 


I-Iand=Book 


FOR 


BANK     OFFICBRS. 


PART  ONE 

CHAPTER  I. 


I.AWFUL-MONEY  RESERVE. 
Legal  Requirements. 

The  "reserve"  of  a  bank  is  that  proportion  of  its 
"deposits"  or  liabilities  payable  on  demand,  which 
it  is  reqnired,  by  law,  "at  all  times"  to  "have  on 
hand  in  lawful  mone}^  of  the  United  States." 

The  law  bearing  on  the  subject  is  to  be  found 
in  sections  5191,  5192,  and  5195,  United  States 
Revised  Statutes,  chapter  4,  National-bank  Act ;  in 
sections  2  and  3  of  the  act  of  June  20,  1874  ;  and 
in  sections  i  and  2  of  the  act  of  March  3,  1887. 
All  of  these  will  be  found  in  the  "National-bank 


2  HAND-BOOK    FOR   BANK   OFFICERS. 

Act,"  edition  of  1888,  compiled  under  direction  of 
the  Comptroller  of  the  Currency. 

The  cash  resources  which  the  law  requires  a 
bank  to  lay  aside  at  all  times  in  this  way  constitute 
the  sheet-anchor  of  safety  in  stormy  financial 
weather,  and  as  a  matter  of  policy  alone,  apart  from 
other  considerations,  too  great  stress  can  not  be 
laid  upon  the  importance  of  a  faithful  and  uniform 
compliance  with  the  law  in  this  particular,  in  spirit 
as  well  as  in  letter. 

Striking  proof  that  this  view  of  the  subject  is 
held  and  practiced  by  bank  managers  as  a  body  is 
found  in  the  fact  that  although  the  law  requires 
National  banks  located  outside  of  reserve  cities 
(over  2,800  in  number)  to  maintain  a  reserve  of  15 
per  cent,  only,  their  reports  show  that  these  banks 
habitually  carry  a  reserve  equal  to  an  average  on 
the  whole  of  over  28  per  cent.  (See  page  195, 
Comptroller's  Report  for  1888.) 

That  the  framers  of  the  law  evidently  realized 
the  importance  of  this  feature  also,  is  apparent  from 
the  fact  that  the  law  prescribes  for  habitual  viola- 
tions of  the  statute,  in  this  particular,  the  summary 
and  severe  penalty  applying  in  only  a  few  other 
places,  viz.,  the  appointment  of  a  receiver  to  wind 
up  the  bank's  affairs.      (See  section  5 191.) 


LAWFUI.-MONEY    RESERVE.  3 

Required  on  Deposits  only. 

Attention  is  here  called  to  the  fact  that  previous 
to  the  passage  of  the  act  of  June  20,  1874,  the  law 
required  National  banks  to  maintain  a  reserve  on 
their  "circulation"  outstanding  as  well  as  on  their 
"deposits,"  but  this  requirement  was  repealed  b}^ 
the  act  named,  and  since  then  a  reserve  has  been 
required  on  "deposits"  only.  The  act  of  1874  also 
provided  that  each  bank  should  keep  on  deposit 
with  the  Treasurer  of  the  United  States  an  amount 
of  lawful  money  equal  to  5  per  cent,  of  its  "circu- 
lation," for  the  redemption  of  which  at  the  United 
States  Treasury  this  act  provides,  but  the  bank 
was  at  the  same  time  permitted  to  count  this  "  5 
per  cent,  redemption  fund"  as  a  part  of  its  reserve 
on  "deposits." 

List  of  Reserve  Cities. 

There  are  at  present  nineteen  "reserve  cities," 

as  per  list  given  below,  sixteen  of  which  were  des- 
ignated in  section  5 191,  while  three  others,  viz.: 
Kansas  Cit}^,  Mo.,  St.  Joseph,  Mo.,  and  Omaha, 
Nebr.,  have  been  recently  added  under  the  opera- 
tion of  the  act  of  March  3,  1887. 

Chicago  and  St.  Louis,  which  had  been  "reserve 
cities"  previously,  became  "central  reserve  cities" 
under  the  provisions  of  the  act  of  March  3,  1887. 

See  note  on  page  facing  first  page. 


4  HAND-BOOK    FOR   BANK    OFFICERS. 

Central    Reserve    Cities: 

New  York  City,  N.  Y. 
Chicago,  111.  St.  Louis,  Mo. 

Reserve  Cities  : 

Albany,  N.  Y.  Milwaukee,  Wis. 

Baltimore,  Md.  New  Orleans,  La. 

Boston,  Mass.  Washington,  D.  C. 

Cincinnati,  Ohio.  Omaha,  Nebr. 

Cleveland,  Ohio.  Philadelphia,  Pa. 

Detroit,  Mich.  Pittsburgh,  Pa. 

Kansas  City,  Mo.  San  Francisco,  Cal. 

Louisville,  Ky.  St.  Joseph,  Mo. 

Classification  of    Banks  with   regard  to  Percentage 
of  Reserve  required. 

It  will  be  found,  from  the  portions  of  the  law 
quoted,  that  in  the  matter  of  reserve  requirements 
the  National  banks  are  divided  into  three  distinct 
classes,  according  to  location,  viz.: 

1.  Those  located  in  the  three  "central  reserve  cities," 
which  are  required  to  maintain  a  reserve  equal  to  25  per  cent, 
of  their  "deposits,"  and  to  keep  the  entire  amount  on  hand 
in  bank. 

2.  Those  located  in  the  sixteen  other  "reserve  cities," 
which  must  also  maintain  a  reserve  of  25  per  cent,  on  "  de- 
posits," but  are  required  to  keep  only  one- half  oi  same  on 
hand  /;/  bank,  while  they  may  keep  the  remainder  on  deposit 
with  any  National  bank,  or  banks,  located  in  any  of  the 
'* central  reserv^e  cities." 

3.  Those  located  outside  of  the  nineteen  "reserve  cities," 
which  are  required  to  maintain  a  reserve  of  only  15  per  cent, 
on  "deposits,"  and  to  keep  on  hand  in  bank  only  two-fifths 

See  note  on  page  facing  first  page. 


r 

tAWFUIv-MONEY    RESERVE.  5 

of  this,  while  the  remainder  may  be  kept  on  deposit  with  any 
National  bank,  or  banks,  located  in  an}^  of  the  nineteen  "re- 
serve cities." 

Of  course,  if  any  bank  of  the  second  or  third  class 
does  not  avail  itself  of  the  privilege  of  keeping  a 
portion  of  its  reserve  with  "reserve  agents,"  it 
must  keep  the  entire  required  amount  on  hand  in 
bajik. 

It  will  be  observed  that  while  section  5192  in- 
cluded banks  located  in  Richmond  and  Charleston 
among  those  privileged  to  act  as  "reserve  agents" 
for  the  15  per  cent,  banks,  section  5 191  did  not  im- 
pose upon  them  the  necessity  for  keeping  a  reserve 
eqtial  to  25  per  cent,  of  their  "deposits,"  as  was  re- 
quired of  banks  located  in  the  other  cities  named  in 
section  5192,  and  for  this  reason  the  privilege  of 
acting  as  "reserve  agents"  has  never  been  accorded 
by  the  Comptroller's  of6.ce  to  National  banks  in 
those  two  cities. 

Various  forms  of  Lawful  Money  available  for  Reserve. 

As  the  law  prescribes  that  the  reserve  of  a  bank 
must  be  in  "lawful  mone}^  of  the  United  States," 
the  term  "lawful  money"  is  defined  as  follows: 

Previous  to  the  resumption  of  specie  payments, 
on  the  ist  of  January,  1879,  "lawful  money"  vir- 
tually meant  United  vStates  "legal-tender"  notes, 


6  HAND-BOOK   FOR   BANK   OFFICERS. 

gold  and  silver  coin  being,  until  then,  at  a  premium, 
and  not  in  general  circulation,  but  since  then  the 
term  has  embraced  various  forms  of  currency, 
which  it  is  important  for  every  bank  to  know,  in 
order  that  it  may  intelligently  carry  out  the  re- 
quirements of  the  law  in  the  matter  of  reserve. 
The  following  list  of  the  various  forms  of  "lawful 
money"  available  for  reserve  purposes  existing  at 
present  is,  therefore,  given: 

1 .  Gold  coin  of  the  United  States. 

2.  "Standard"  silver  dollars  of  the  United  States. 

3.  Fractional  silver  coin  of  the  United  States. 

4.  Certificates  for  gold  coin  deposited  with  the  Treas- 

urer of  the  United  States. 

5.  Certificates   for   silver   dollars   deposited   with   the 

Treasurer  of  the  United  States. 

6.  United  States  "legal-tender"  notes. 

7.  Certificates  for  "legal-tender"  notes  deposited  with 

the  Treasurer  of  the  United  States. 

8.  Gold  clearing-house  certificates. 

In  order  that  reserve  may  readily  be  computed 
at  any  time,  and  that  the  information  required  for 
reports  of  condition  (which  are  always  called  for 
past  dates)  may  be  fully  and  accurately  stated,  it 
is  absolutely  necessary  that  a  daily  and  exact  re- 
cord of  the  amount  of  each  kind  of  the  various  kinds 
of  currency  should  be  kept  for  this  purpose.  That 
this  may  be  done,  it  will  of  course  be  necessary  to 

See  note  on  page  facing  first  page. 


I^AWFUL-MONEY   RESERVE.  7 

assort  the  cash  on  hand  at  close  of  business  each 
day,  and  in  doing  this,  National-bank  currency 
should  be  separated  from  other  forms  of  paper  cur- 
rency, and  in  case  a  bank  has  any  notes  of  its  own 
issue  on  hand,  these  should  in  turn  be  separated 
from  those  issued  by  other  banks. 

Deposits,  and  Sundry   Items  which  are  allowed  to 
Offset  Deposits. 

The  term  ''deposits,"  used  in  those  portions  of 
the  law  which  bear  on  the  subject  of  reserve,  em- 
braces not  only  all  classes  of  what  are  known  as 
''  individual  deposits  "  held  b\^  a  bank,  but  deposits 
made  by  the  United  States  Government  and  by  its 
disbursing  officers  also. 

Balances  due  to  other  National  banks  and  to  State 
and  private  banks  and  bankers,  being,  as  a  rule, 
payable  on  demand,  have  always  been  regarded  as 
"deposits"  also,  and  any  bank  holding  these  has 
been  required  to  maintain  a  reserve  upon  such  bal- 
ances, balances  due  from  other  banks  and  bankers 
being  allowed  to  "offset"  the  balances  due  to  them; 
but  when  in  au}^  case  the  amount  due  from  banks 
and  bankers  exceeds  the  amount  due  lo  them,  such 
excess  can  not  be  applied  in  reduction  of  liability  on 
other  "deposits,"  and  amounts  due  from  and  to 
banks  and  bankers  are  then  excluded  from  both 


8  HAND-BOOK   FOR   BANK   OFFICERS. 

sides  of  the  calculation  necessary  for  determining 
"deposits"  and  reserve  required  thereon. 

The  other  items  of  a  bank's  "resources"  which, 
under  the  various  rulings  of  the  Comptroller's 
office,  are  admitted  to  offset  or  reduce  its  liability 
on  "deposits"  are  as  follows: 

1.  "  Exchanges  for  clearing-house,"  viz.:  checks  on  other 
banks  in  same  place,  which  are  members  of  a  clearing-house. 

2.  "  Checks  on  other  banks  in  same  place." 

3.  "Bills  of  other  National  banks"  held  by  the  bank. 
Bills  of  the  bank's  own  issue  are,  of  course,  not  admitted  to 
offset  its  liabilities  on  ' '  deposits. ' ' 

Reciprocal  Accounts  with  Reserve  Agents. 

It  is  the  custom  with  some  banks  to  keep  recip- 
rocal ^.o.down'i.^  with  their  "reserve  agents,"  and  in 
such  cases  the  question  arises  as  to  how  these  items 
should  be  treated. 

As  the  law  provides  that  a  portion  of  a  bank's 
"reserve  may  consist  of  balances  due  to"  it  "  from 
associations  approved  by  the  Comptroller  of  the 
Currency,"  such  items  should,  as  a  rule,  be  treated 
as  follows  in  computing  reserve: 

1.  If  the  balance  oi  any  such  "reciprocal  account"  is  an 
amount  ^mq^  from  the  "reserve  agent"  bank,  ?m<i\i  balance 
may  be  treated  as  available  for  reserve. 

2.  But,  if  such  balance  represents  an  amount  due  to  the 
"reserve  agent,"  then  it  should  be  regarded  as  " due  ^'t? other 
National  banks, ' '  and  so  treated. 


LAWFUL- MONEY   RESERVE.  9 

-*■ 

Examples  showing    how    Reserve    should    be    com- 
puted in  Ordinary  Cases. 

To  clearly  illustrate  how  the  reserve  of  a  bank 
should  be  computed  in  any  ordinary  case,  two  ex- 
amples are  given  here;  the  first  (Form  A)  of  a 
bank  which  should  have  25  per  cent,  on  hand;  the 
second  (Form  B)  of  a  bank  which  should  have  15 
per  cent,  on  hand.  Each  of  these  examples  is 
computed  on  a  form  identical  in  every  respect  with 
the  printed  blanks  now  used  in  the  Comptroller's 
office  for  this  purpose. 

The  great  advantage  of  this  form  consists  in  the 
fact  that  down  to  the  point  of  finding  the  amount 
of  "deposits"  upon  which  reserve  is  to  be  main- 
tained, the  process  is  the  same  iox  all  banks  regard- 
less of  location.  Beyond  this  point  it  is  only  neces- 
sary to  apply  the  proper  proportion  required  by 
each  case  (viz.,  25  per  cent,  or  15  per  cent.),  and 
the  proper  distributioii  of  the  reserve  in  bank  and 
i7t  hands  of  agents  required  in  such  case. 

In  exceptional  cases,  which  are  defined  and  illus- 
trated on  pages  12  to  20,  all  that  is  needed  is 
to  extend  the  ordinary  computation  a  little  further 
b}'  a  very  short  and  simple  calculation.  Concise 
rules  for  this  calculation  are  given  on  page  12. 

With  a  copy  of  this  general  printed  form,  and  the 
few  rules  referred  to,  the  computation  of  reserve  in 
the  case  of  any  bank,  under  any  circumstances,  be- 
comes an  easy  and  simple  matter. 


lO 


HAND-BOOK    FOR   BANK   OFFICERS. 


Form   A. ^Calculation   of   the   Lawful-Money   Reserve    of   National 

Banks  Located  in  Reserve  Cities  and  Central  Reserve  Cities. 

Items  on  Which  Reserve  is  to  be  Computed. 

LIABILITIES. 

Due  to  National  Banks* 1235,866 

Due  to  State  banks  and  bankers 25,559 


1261,425 


LESS 

Due  from  other  National  banks 125,335 

Due  from  State  banks  and  bankers  ....     100,000 


*Should  the  aggregate  "Due 
from  "  exceed  the  aggregate  "  Due 
to"  banks,  both  items  must  be 
omitted  from  the  calculation 


225,335 

Dividends  unpaid 

Individual  deposits  .... 
United  States  deposits  .  .  . 
Deposits  of  U.  S.  dis.  ofl&cers 


136,090 

3,867 

2,857,628 

705,000 


Gross  amount 13,602,585 


DEDUCTIONS   ALLOWED. 

Exchanges  for  clearing-house 

Checks  on  other  banks  in  the  same  place  .    . 
National-bank  notes 


5107,950 

513 

17,340 


Twenty-five  per  cent,  of  this  total  amount  Jl®" 


125,803 

,476,782 


is  the  entire  reserve  required,  which  is 869,195 

Deduct  5  %  redemption  fund  with  Treasurer  U.  S.  .  2,250 

Net  reserve  to  be  held |866,945 

Items  Composing  Net  Reserve  and  Distribution  of  Same. 


One-half  of  the  net  reserve 

is* 1433,472 

*If  reciprocal  accounts  are 
kept  with  reserve  agents,  only 
the  net  amount  due  from  such 
agents  is  available  for  reserve. 


Balances  with  approved  re- 
serve agents  amount  to  440,067 


Excess  with  reserve  agents 


6,595 


One-half  of  net  reserve  is  |433,473 
Items  in  bank's  pos- 
session to  make  up 
the  same,  viz. : 
Fractional  silver     129,885 
Silver  dollars  .    . 
Silver  Treas.  cert. 
Gold  coin   .... 
Gold  Treas.  cert. 
Legal-ten'r  notes 
U.  8.  cert,  of  de- 
posit for  legal- 
tenders     .    .    . 
Gold  C.  H.  cert's 


1,090 

22,060 

300,050 

50,000 

12,000 


20,000 


Excess  in  items  held  by  the 
bank 


435,085 


$1,612 


LAWFUL-MON:eY    RESERVE. 


II 


Form  B. — Calculation  of  the  Lawful- Money  Reserve  of  National  Banks 

Not  Located  in  Reserve  Cities  or  Central  Reserve  Cities. 

Items  on  Which  Reserve  is  to  be  Computed. 

WABIWTIES. 

Due  to  National  banks* 182,946 

Due  to  State  banks  and  bankers 16,735 

l99,68i 


I^ESS 

Due  from  other  National  banks 1:25,043 

Due  from  State  banks  and  bankers      ....         5,695 


*  should  the  aggregate  "Due 
from  "  exceed  the  aggregate  "  Due 
to"  banks,  both  items  must  be 
omitted  from  the  calculatiou. 


30,738 

168,943 

Dividends  unpaid 621 

Individual  deposits 728,423 

United  States  deposits     .    .    .  55,ooo 

Deposits  of  U.  S.  dis.  officers  .  36,098 


Gross  amount 

DEDUCTIONS   ALIvOWED. 

Exchanges  for  clearing-house 

Checks  on  other  banks  in  the  same  place  ... 
National-bank  notes , 


1889,085 


fe,S94 
1,650 


Fifteen  per  cent,  of  this  amountg@° 


5.544 
3-541 


is  the  entire  reser\'e  reqtiired,  which  is I'i32,53i 

Deduct  5  %■  redemption  fund  with  Treasurer  U.  S.  .         1,125 


Net  reserve  to  be  held 1131,406 

Items  Composing  Net  Reserve  and  Distribution  of  Same. 


Three-fifths  of  the  net  re- 
serve is* 178,844 

*If  reciprocal  accounts  are 
kept  with  reserve  agents,  only 
the  Hi't  amount  due  from  such 
agents  is  available  for  reserve. 


Balances  with  approved  re- 
serve agents  amount  to      50,796 


Two-fifths  of  net  reserve  is   ^2,562 
Items  in    bank  which 
may  lawfully  make 
up  the  same,  viz. : 
Fractional    silver     ^2,094 
Silver  dollars  .    .         4,450 
Silver  Treas.  cert.       8,575 
Gold  coin     .    .    .       51,896 
Gold  Treas.  Cert.       3,000 
Legal-ten'r  notes     15,025 
U.  S.   cert,  of  de- 
posit for  legal- 
tenders     

Gold  C.  H.  cert's  .    .    . 


Deficiency  with  reserve 

agents 128,048 

RECAPITULATION 

Excess  in  the  entire  reserve  held 


85,040 


Excess  in   the    two-fifths 

reserve  held $32,478 


14,430 


12  HAND-BOOK   FOR   BANK   OFFICERS. 

Exceptional  Cases. 

It  sometimes  happens  that,  while  the  "aggre- 
gate" reserve  of  a  bank  located  outside  of  a  "cen- 
tral reserve  city"  is  more  than  sufficient,  it  has  not 
a  sufficient  amount  on  hand  in  bank;  in  other 
words,  it  has  more  than  is.  necessary  in  the  hands 
of  "  reserve  agents."  In  such  a  case,  while  the  law 
does  not  permit  such  excess  with  "  agents  "  to  offset 
a  deficiency  in  the  reserve  needed  in  bank^  such 
"excess"  may  be  regarded  as  "due  from  other 
banks,"  and,  as  such,  applied  in  the  same  way  to 
reduce  liability  on  "  deposits,"  with  the  result  some- 
times of  so  reducing  the  amount  of  reserve  needed 
in  bank  as  to  show  that  the  "lawful  money"  on 
hand  is  sufficient. 

In  order  to  find  and  apply  the  exact  excess  in  the 
hands  of  "reserve  agents"  use  the  following: 

Rules  for  finding  Exact  Excess  with  Reserve  Agents 
and  for  applying  it  to  Reduction  of  Liability  on 
"Deposits." 

From  the  amount  actually  in  hands  of  "  reserve 

agents,"  deduct  the  amount  which  by  the  ordinary 

method  of  computation  it  seems  should  be  there; 

the  remainder  will  be  the  "apparent  excess." 

I.  In  the  case  of  a  "  reserv^e  city"  bank,  add  one-seventh 
of  the  "apparent  excess"  to  such  "apparent  excess"  and 


LAWFUL-MONEY    RESERVE.  1 3 

their  sum  will  be  the  ' '  exact  excess ' '  which  may  be  applied 
to  reduction  of  liability  on  "deposits." 

II.  In  the  case  of  a  15  per  cent,  bank,  add  yiine-ninety-firsts 
of  the  ' '  apparent  excess ' '  to  such  ' '  apparent  excess, ' '  and 
their  sum  will  be  the  ' '  exact  excess. ' ' 

Having  ascertained  the  "exact  excess"  in  this 
way  proceed  to  apply  it  to  reduction  of  liability  on 
"deposits"  and  to  the  consequent  decrease  of  re- 
serve apparently  required  to  be  in  bank  as  follo\vs: 

I.  Where  the  "exact  excess"  equals  or  exceeds 
the  balance  due  to  other  banks  and  bankers,  as 
shown  by  ordinary  method  of  computation,  the 
amotmt  by  which  the  reserve  apparently  required 
in  bank  may  be  decreased  wall  be — 

{a)  In  the  case  of  a  "reserve  city"  bank,  one-eiglitli  of  the 
balance  due  to  other  banks  and  bankers. 

{U)  In  the  case  of  a  15  per  cent,  bank,  6  per  cent,  of  the 
batance  due  to  other  banks  and  bankers. 

Note. — The  reason  for  this  is,  that  in  such  a  case  the  treatment  of 
the  "excess"  with  "agents"  as  an  amount  <hxii.  frotn  banks  and  bank- 
ers causes  the  amount  A.\x^ from  to  offset  the  amount  due  to  other, 
banks  and  bankers  and  so  eliminates  the  balance  due  to  them  from  the 
computation,  and  therefore  renders  it  unnecessar}'  to  provide  for  a  re- 
serve on  such  balance. 

II.  Where  the  "exact  excess"  is  less  than  the 

balance  due  to  other  banks  and  bankers,  the  amount 

by  which  the  reserve  apparently  required  ///  bank 

may  be  decreased  will  be — 

(a)  In  the  case  of  a  "reserve  city  "  bank,  one-seventli  (|) 
of  the  ' '  apparent  excess. ' ' 


14  HAND-BOOK    FOR    BANK    OFFICERS. 

{b)  In  the  case  of  a  15  per  cent,  bank,  six-ninety-firsts  (^) 
of  the  ''  appa7'-ent  excess.'' 

As  ^  of  any  amount  is  a  little  less  than  one-fifteenth 
(-(fo)  of  such  amount,  it  will  involve  less  labor  to  find  y\  of 
the  ' '  apparent  excess ' '  and  this  portion  will  be  nearly 
enough  correct,  unless  the  ' '  excess  "  is  a  large  amount. 

Note. — The  reason  for  this  is  that  in  such  a  case  the  treatment  of 
the  "  excess"  with  "agents"  as  an  amount  due /"row  other  banks  has 
the  effect  of  reducing  the  liability  on  the  balance  due  to  other  banks, 
and  therefore  renders  it  unnecessary  to  provide  for  a  "reserve  "  on  the 
amount  of  such  "excess." 


To  illustrate  tlie  application  of  these  rules  for 
"exceptional"  cases,  two  examples  are  given:  the 
first  (Form  A)  illustrating  the  case  of  a  25  per 
cent,  bank ;  the  second  (Form  B)  illustrating  the 
case  of  a  15  per  cent,  bank,  each  of  which  has  an 
amount  with  "  agents"  in  excess  of  legal  require- 
ments. 


Note. — In  all  computations  for  ascertaining  reserve  it  should  be  dis- 
tinctly understood  that  any  excess  in  the  hands  of  agents  can  not  be 
counted  as  reserve  for  the  reason  that  the  law  (Sees.  5192  and  5195) 
fixes  a  limit  to  the  amount  in  the  hands  of  agents  which  may  so  be 
counted,  and  au}'^  amount  over  and  above  the  designated  limit  or  pro- 
portion has  not  the  legal  status  of  reserve  and  can  not  so  be  regarded. 


LAWFUL-MONEY    RESERVE. 


15 


Form   A. —  Calculation    of    the   Lawful-Money   Reserve    of   National 

Banks  Located  in  Reserve  Cities  and  Central  Reserve  Cities. 

Items  on  Which  Reserve  is  to  be  Computed. 

LIABIUTIES. 

Due  to  National  Banks* |i59,387 

Due  to  State  banks  and  bankers 6,041 

1165,428 

LESS 
Due  from  other  National  banks     .....      89,072 
Due  from  State  banks  and  bankers  ....      20,861 


*  Should  the  aggregate  "Due 
from  "  exceed  the  aggregate  "  Due 
to"  banks,  both  items  must  be 
omitted  from  the  calculation 


109,933 

Dividends  unpaid 

Individual  deposits  .... 
United  States  deposits  .  .  . 
Deposits  of  U.  S.  dis.  officers 


155,495 

5,488 

618,978 

110,000 


Gross  amount 1789,961 


DEDUCTIONS   ALLOWED. 

Exchanges  for  clearing-house 

Checks  on  other  banks  in  the  same  place  .    . 
National-bank  notes 


80,696 
1,020 
8,326 


Twenty-five  per  cent,  of  this  total  amount  fi®"    .    . 

is  the  entire  reserve  required,  which  is 

Deduct  5  %  redemption  fund  with  Treasurer  U.  S.  . 


90,042 
1699,919 


174,979 
4,500 


Net  reserve  to  be  held 1170,479 

Items  Composing  the  Net  Reserve  and  Distribution  of  Same. 


One-half  of  the  net  reserve 

is* 185,239 

*If  reciprocal  accounts  are 
kept  with  reserve  agents,  only 
the  lief  amount  due  from  such 
agents  is  available  for  reserve. 

Balances  with  approved  re- 
serve agents  amount  to    144,936 


One-half  of  net  reserve  is  ^85,240 
Items  in  bank's  possession 
to  makeup  the  same,  viz.: 
Fractional  silver  f4,209 
Silver  dollars  .  .  2,006 
vSilver  Treas.  cert.  4,500 
Gold  coin  ....  41,695 
Gold  Treas.  cert.  12,050 
Legal-ten 'r  notes      14,280 


78,740 


"Apparent  excess"  with 
reserve  agents     ....     $59,697 

To  find  "exact  excess"  add 

one-seventh   of    this  =       8,528 


Apparent  deficiencj'  of  re- 
serve in  bank $6,500 

As  "exact  excess"  exceeds 
balance  due  banks  ($55,495), 
take  one-eighth  of  such  bal- 
ance      6,937 


"Exact  excess"  with  re- 
serve agents  is    ...    .     $68,225 

RECAl'ITULATION. 

JSxcess  in  the  entire  reserve  held 


Showing  actual  excess  of 
reserve  in  bank  of  .    . 


•  1437- 


1437 


i6 


HAND-BOOK    FOR    BANK   OFFICERS. 


Form  B. — Calculation  of  the  Lawful- Money  Reserve  of  National  Banks 

Not  Located  in  Reserve  Cities  or  Central  Reserve  Cities. 

Items  on  Which  Reserve  is  to  be  Computed. 

WABIIvITIES. 

Due  to  National  banks*      139,873 

Due  to  State  banks  and  bankers 4,261 


LESS 
Due  from  other  National  banks    .    . 
Due  from  State  banks  and  bankers 


^7,382 
2,543 


*  Should  the  aggregate  "Due 
from  ' '  exceed  the  aggregate  ' '  Due 
to"  banks,  both  itenas  must  be 
omitted  from  the  calculation.  ■ 


144,134 


9.925 


134,209 

Dividends  unpaid 410 

Individual  deposits 241,444 

United  States  deposits     .    .    .     110,000 
Deposits  of  U.  S.  dis.  officers  .        ... 


Gross  amount 1386,063 

DEDUCTIONS  AI<I,OWED. 

Exchanges  for  clearing-bouse 

Checks  on  other  banks  in  the  same  place  .    .    .    .       $2,263 

National-bank  notes 5,33o 

7,593 


Fifteen  per  cent,  of  this  amountg^^      1378,470 


is  the  entire  reserve  required,  which  is $56,770 

Deduct  5  %  redemption  fund,  with  Treasurer  U.  S.  .         2,250 


Net  reserve  to  be  held 


154,520 
Items  Composing  the  Net  Reserve  and  Distribution  of  Same. 

|2i,8o8 


Three-fifths  of  the  net  re- 
serve is*  132,712 

*If  reciprocal  accounts  are 
kept  with  reserve  agents,  only 
the  }iel  amount  due  from  such 
agents  is  available  for  reserve. 


Balances  with  approved  re- 
serve agents  amount  to     61,832 

' '  Apparent   excess ' '   with 

reserve  agents    ....     $29,120 
To   find    "exact   excess" 

add  Ti'j  of  this  =   ,    .    .         2,880 


Two-fifths  of  net  reserve  is 

Items  in   bank  which  may 

up     the 


Showing  actual 


Exact  excess  with  reserve 

agents  is $32,000 

RECAPITUIvATION 

Excess  in  entire  reserve  held  .    . 


lawfully    make 
same,  viz.: 
Fractional    silver     $2,012 
Silver  dollars  .    .  540 

Silver  Treas.  cert.  3, 165 
Gold  coin  .  .  .  3,946 
Gold  Treas.  Cert.  2,780 
Legal-ten'r  notes       8,000 

»  

Apparent  deficiency  of  re- 
serve in  bank  .... 
As  "exact  excess  "  is  less 
than  balance  due  banks 
($34,209),  take  vfi  of 
"  apparent  excess  "   .    . 


20,443 
$1,365 

1,920 


excess  of        $555 
$555- 


LAWFUIv-MONEY    RESKRVE.  1 7 

CHAPTER  II. 

LAWFUIv-xAIONEY  RESERVE. 

Explanation  of  Rules  applying  in  Exceptional  Cases. 

As  some  readers  will  naturally  wish  to  know 
the  reasons  for  applying  the  rules  for  "  exceptional " 
cases  given  in  the  preceding  chapter,  the  following 
explanation  in  each  of  the  two  cases  therein  illus- 
trated is  given  here. 

Explanation  of  Case  of  25  Per  Cent.  Reserve  Bank. 

It  is  evident,  at  a  glance,  that  when  the ''  apparent 
excess"  of  $59,697  is  considered  as  "due  from 
other  banks,"  and  is  applied  to  reduction  of  liability 
on  "deposits,"  it  will  have  the  effect  of  making  a 
proportionate  reduction  in  the  amount  of  reserve 
required.  The  reserve  allowed  with  "agents" 
being  one-half  of  one-fourth,  or  one-eigJitJi  of  the 
amount  of  "net  deposits,"  the  reduction  here  will 
be  in  the  proportion  of  one  dollar  of  reserve  to  every 
eiglit  dollars  applied  in  reduction  of  "deposits." 

This  being  the  established  ratio,  we  know  that 
the  "additional  excess"  with  "agents"  must  be 
onc-cigJitJi  of  the  "exact  excess"  to  be  applied  in 
reduction.     We  also  know  that  this  "  exact  excess" 


1 8  HAND-BOOK    FOR   BANK   OFFICERS. 

will  consist  of  the  "apparent  excess"  ($59,697), 
increased  by  the  "additional  excess,"  and  knowing 
so  much,  we  can  readily  ascertain  the  amount  of 
"additional  excess." 

To  simplify  the  illustration,  let  us  assume  that 
X  represents  the  unknown  "additional  excess," 
and,  from  what  has  just  been  stated,  we  obtain  the 
following  equation : 

Eight  times  X  is  equal  to  $59,697  increased  by 
X;  or,  taking  the  amount  X  from  each  side  of  the 
equation,  seven  times  X  is  equal  to  $59,697,  and 
dividing  each  side  by  seven  we  find  that  X,  or  the 
"additional"  amount,  is  equal  to  $8,528;  and  that 
$68,225  (eight  times  X)  is  the  exact  amount  that 
can  be  applied  to  reduction  of  liability  on  "  de- 
posits." 

As  this  "exact  excess"  ($68,225)  exceeds  the  bal- 
ance due  to  banks  and  bankers  ($55,495)  it  will 
have  the  effect  of  eliminating  the  latter  item  from 
the  computation,  and  of  converting  the  "  apparent 
deficiency  of  reserve  in  bank "  ($6,500)  into  an 
actual  excess  of  $437  instead.  (See  Rule  I,  clause 
(^),  page  13.) 

As  the  "  apparent  excess  "  in  this  example  was 
of  itself  greater  than  the  balance  due  to  banks, 


LAWFUL-MONEY    RESERVE.  I9 

it  was  not  necessary  to  carry  out  the  computa- 
tion to  find  "  exact  excess,"  but  this  has  been  done 
simply  to  show  how  it  should  be  done  when  cir- 
cumstances require. 

Explanation  of  Case  of  15  Per  Cent.  Reserve  Bank. 

In  the  case  of  this  15  per  cent,  reserve  bank,  the 
excess  with  reserve  agents  can  be  applied  in  the 
same  way  to  reduction  of  liability  on  "deposits,"  the 
prop07'tion^  of  course,  being  changed. 

With  such  a  bank  the  law  allows  a  portion  of 
its  reserve  equal  to  9  per  cent,  of  net  deposits  to 
be  kept  with  "agents;"  therefore,  the  proportion 
that  "reserve  with  agents"  should  bear  to  "de- 
posits" is  as  9  to  100. 

Applying  the  same  line  of  reasoning  as  in  the 
case  of  the  25  per  cent,  bank,  we  find  that  the 
"  apparent  excess  "  is  $29,120,  and  assuming  that  X 
represents  the  whole  "excess"  that  can  be  applied, 
we  know  that  9  per  cent,  of  X,  or  yf  0  of  X,  will 
be  the  "additional"  excess  which  can  be  released 
from  its  function  as  reserve  and  applied  to  reduction 
of  liability,  and  also  that  the  "exact  excess"  will 
be  the  "apparent  excess"  increased  by  this  "addi- 
tional excess." 


20  HAND-BOOK    FOR    BANK   OFFICERS. 

We  have,  therefore,  from  this  the  following  equa- 
tion :  X  equals  $29,1 20,  increased  by  g  per  cent,  of  X; 
and,  deducting  9  per  cent,  of  X  from  each  side  of 
the  equation,  we  have  X  less  xo  0  of  X,  or  tVo  of  X 
equals  $29,120;  and  from  this,  yio  of  X,  or  i  per 
cent,  of  X,  equals  $320;  and  9  per  cent,  of  X  equals 
$2,880,  which  is  the  "  additional "  excess  to  be  added 
to  $29,120  to  make  $32,000,  the  "exact  excess" 
which  can  be  applied  to  reduction  of  liability. 

As  the  ratio  of  "  reserve  in  bank"  to  "deposits" 
is  6  per  cent.,  when  the  "deposits"  are  reduced  by 
$32,ooo,'$i,920  less  "reserve  "will  be  needed /;^  bank. 
But,  $1,920  is  just  -gr  of  $29,120,  the  "apparent  ex- 
cess," so  that  the  amount  by  which  the  reserve  ap- 
parently required  in  bank  may  be  decreased  will  be 
g-T  of  the  "apparent  excess"  with  agents.  (See 
Rule  II,  clause  [b).,  page  14.) 

Simple  Method  of  keeping  the  5  Per  Cent  Redemp- 
tion Fund  Account. 

As  it  appears  to  be  the  custom  with  many  banks 
to  credit  their  circulation  account  with  all  of  their 
notes,  both  "  fit"  and  "unfit,"  which  have  been  re- 
deemed and  returned  by  the  United  States  Treas- 
urer, and  to  charge  this  account  with  all  amounts 
remitted  to  the  Treasurer  to  reimburse  their  5  per 
cent,  fund,  it  is  suggested  that  all  such  redemption 


LAWFUL-MONEY   RESERVE;.  21 

transactions  should  be  entered  in  the  5  per  cent, 
fund  account  on  the  books  of  the  bank,  and  not  in 
the  circulation  account,  which  should  show  a  fixed 
balance,  representing  the  circulation  issued  to  the 
bank  on  its  bonds,  and  should  not  be  altered  at  any 
time,  except  to  be  increased  by  the  amount  of  cir- 
culation issued  to  it  on  deposit  of  additional  bonds, 
or  to  be  decreased  by  the  deposit  of  lawful  money 
with  the  United  States  Treasurer  for  the  purpose 
of  reducing  circulation  and  withdrawing  bonds. 

To  illustrate  how  entries  should  be  made  in  the 
5  per  cent,  fund  account,  let  us  assume  that  the 
Treasurer  has  on  deposit  for  the  bank  a  fund  of 
$2,250,  and  that  he  redeems  for  the  bank  $1,000  of 
its  notes,  of  which  $500  are  "fit"  and  $500  are 
"unfit."  Upon  receipt  of  the  $500  "fit"  notes  the 
bank  should  debit  "Cash"  and  credit  its  5  per 
cent,  fund  account,  and  make  a  similar  entry  when 
it  receives  the  $500  incomplete  currenc}^  from  the 
Comptroller's  office  in  replacement  of  the  "  unfit  " 
redeemed  by  the  Treasurer  and  destroyed.  These 
entries  woul4  reduce  the  5  per  cent,  fund  account 
to  $1,250  debit  balance,  and  it  would  be  restored  to 
its  proper  amount,  $2,250,  when  the  bank  remits 
$1,000  to  reimburse  its  account  with  the  Treasurer, 


22  HAND-BOOK   FOR    BANK   OFFICERS. 

for  then  the  account  would  be  debited  with  $i,ooo, 
and  "  Cash"  credited  with  the  same  amount. 

This  method  of  treatment  would  be  very  simple ; 
the  account  would  always  exhibit  the  exact  balance 
in  hands  of  the  Treasurer,  and,  in  fact,  would  be 
practically  the  counterpart  of  the  account  as  kept 
on  the  books  of  the  Treasurer. 
How  to  Compute  Average  Reserve. 

In  each  report  of  condition  a  bank  is  required  to 
state  its  average  reserve  on  deposits  for  the  pre- 
ceding 30  days.  To  obtain  this,  take  the  percent- 
age of  reserve  for  each  business  day  during  the  30 
days  preceding  date  of  report  and  add  these  per- 
centages together.  Divide  the  aggregate  so  ob- 
tained by  the  number  of  business  days  and  the 
result  will  represent  the  average  ratio  desired.  (See 
note,  page  14,  as  to  excess  with  reserve  agents  in 
computing  reserve.) 

Form  of  Application  for  Comptroller's  Approval  of 
Reserve  Agent. 

To  THE  Comptroller  of  the  Currency, 

Washington,  D.  C. 

Sir:  Application  is  hereb}^  made  for  your  approval  of  the 

National  Bank as  an  association  with  which 

a  portion  of  the  lawful  money  reserve  of  this  bank  may  be 
kept  in  accordance  with  law. 

Respectfully  yours, 

(To  be  signed  by  Cashier  or  other  officer  of  bank  making  application.) 
Note. — National  banks  in  reserve  cities  may  select  2My  National 
bank  or  banks  in  any  of  the  "central"  reserv'e  cities  only.  Those  lo- 
cated outside  of  reserve  cities  may  select  any  National  bank  or  banks 
in  any  reser^-e  city  or  cities  ' '  central ' '  or  other.  All  selections  are  sub- 
ject to  approval  of  the  Comptroller. 


ORGANIZATION    OP   NATIONAI^   BANKS.  2$ 


PART   TWO. 

CHAPTER  I. 


ORGANIZATION   OF   NATIONAL   BANKS. 

The  law  relating  to  the  organization  of  National 
banks  is  to  be  found  in  sections  5133,  5134,  5135, 
and  5136  United  States  Revised  Statutes,  National- 
bank  Act. 

It  has  not  been  deemed  necessary  to  introduce 
into  this  little  work  all  the  details  of  information 
and  printed  forms  pertaining  to  the  organization  of 
a  National  bank  for  the  reason  that  a  pamphlet 
containing  all  such  information  and  forms,  entitled 
"  Instructions  in  regard  to  the  Organization,  Ex- 
tension, and  Management  of  National  Banks," 
compiled  in  the  year  1884,  under  direction  of  the 
Comptroller  of  the  Currency,  can  be  obtained  free, 
upon  application  to  his  office,  by  any  person  desir- 
ing a  copy,  together  with  any  further  information 
on  the  subject  which  may  not  appear  to  be  em- 
braced in  the  pamphlet. 


24  HAND-BOOK   FOR    BANK    OFFICERS. 

Minimum  Capital  Stock  Required. 

It  may  be  well  to  state  here  that  the  minimiim 
capital  stock  required  of  each  National  bank  (see 
section  5 1 38)  is  based  upon  the  population  of  the  place 
in  which  it  is  located,  at  date  of  its  organization,  as 
follows : 

1 .  $50,000  for  a  bank  organized  in  a  place  having 
6,000  inhabitants,  or  less. 

2.  $100,000  for  a  bank  organized  in  a  city  having 
over  6,000,  but  not  more  than  50,000  inhabitants. 

3.  $200,000  for  a  bank  organized  in  a  city  having 
over  50,000  inhabitants. 

Increase  and  Reduction  of  Capital  Steele. 

This  pamphlet  also  contains  the  information  and 
forms  necessary  to  enable  a  bank  to  increase  or  re- 
duce its  capital  stock  as  provided  by  sections  5142 
and  5143,  respectively. 

Since  the  pamphlet  was  prepared,  section  5142 
has  been  amended  by  "Act  approved  May  i,  1886, 
(see  page  75,  National-bank  Act,  edition  of  1888), 
section  i  of  which  provides  that  a  National  bank 
may  "increase  its  capital  stock  in.  accordance  with 

* 

existing  laws,  to  any  sum  approved  b}^  the  said 
Comptroller,  notwithstanding  the  limit  fixed  in  its 
original  articles  of  association  and  determined  by 
said  Comptroller." 


ORGANIZATION    OP    NATIONAIy   BANKS.  25 

Prior  to  the  passage  of  tliis  act,  in  1886,  the  banks 
had  been  limited  in  any  proposed  increase  of  capi- 
tal to  the  maximnm  of  increase  which  was  named 
and  provided  for  in  their  articles  of  association  at 
time  of  organization. 

« 

Extension  of  Charter. 

The  pamphlet  also  gives  the  forms  and  infor- 
mation necessary  for  procuring  an  extension  of 
corporate  existence  beyond  the  limit  fixed  in  the 
original  charter  granted  at  time  of  a  bank's  organ- 
ization. The  law  on  this  subject  is  to  be  found 
in  the  act  of  July  12,  1882  (pages  68-73,  National- 
bank  Act,  1888),  entitled  "An  act  to  enable  Na- 
tional banking  associations  to  extend  their  cor- 
porate existence,  and  for  other  purposes." 

Minimum  Bond  Deposit  Requirements. 

Section  8  of  the  act  just  mentioned  amended  the 
law  with  regard  to  the  amount  of  bonds  to  be  depos- 
ited by  banks  already  organized,  or  to  be  afterward 
organized,  having  a  capital  of  $150,000,  or  less^  to 
the  effect  that  such  banks  should  not  be  required 
to  deposit  United  States  bonds  to  any  amount  in 
excess  of  one-fourth  of  their  capital  stock. 

The  minimiiin  bond  deposit  required  of  banks 
having  capital  in  excess  of  $150,000  is  uniforml}^ 
$50,000.     (See  section  4,  act  of  June  20,  1874.) 


26  HAND-BOOK   FOR   BANK   OFFICERS. 


CHAPTER  II. 


QUAI.IFICATIONS,  DUTIES,  AND  IvIABII^ITIES  OF 

DIRECTORS. 

Sec.  5146.  Every  director  must,  during  his  whole  term  of 
service,  be  a  citizen  of  the  United  States,  and  at  least  three- 
fourths  of  the  directors  must  have  resided  in  the  State,  Ter- 
ritory, or  District  in  which  the  association  is  located  for  at 
least  one  year  immediately  preceding  their  election,  and  must 
be  residents  therein  during  their  continuance  in  office.  Every 
director  must  owni,  in  his  own  right,  at  least  ten  shares  of 
the  capital  stock  of  the  association  of  which  he  is  a  director. 
Any  director  who  ceases  to  be  the  owner  of  ten  shares  of  the 
stock,  or  who  becomes  in  any  other  manner  disqualified,  shall 
thereby  vacate  his  place. 

Sec.  5147.  Each  director,  when  appointed  or  elected,  shall 
take  an  oath  that  he  will,  so  far  as  the  duty  devolves  on  him, 
diligently  and  honestly  administer  the  affairs  of  such  asso- 
ciation, and  will  not  knowingly  violate,  or  willingly  permit 
to  be  violated,  any  of  the  provisions  of  this  Title,  and  that 
he  is  the  owner  in  good  faith,  and  in  his  own  right,  of  the 
number  of  shares  of  stock  required  by  this  Title,  subscribed 
by  him,  or  standing  in  his  name  on  the  books  of  the  associa- 
tion, and  that  the  same  is  not  hypothecated  or  in  any  way 
pledged  as  security  for  any  loan  or  debt.  Such  oath,  sub- 
scribed by  the  director  making  it,  and  certified  by  the  officer 
before  whom  it  is  taken,  shall  be  immediately  transmitted  to 
the  Comptroller  of  the  Currency,  and  shall  be  filed  and  pre- 
served in  his  office. 


DUTIES  OF   DIRECTORS.  27 

Sec.  5239.  If  the  directors  of  any  National  banking  asso- 
ciation shall  knowingly  violate,  or  knowinglj'  permit  any  of 
the  officers,  agents,  or  serv^ants  of  the  association  to  violate 
any  of  the  provisions  of  this  Title,  all  the  rights,  privileges, 
and  franchises  of  the  association  shall  be  thereby  forfeited. 
Such  violation  shall,  however,  be  determined  and  adjudged 
by  a  proper  circuit,  district,  or  territorial  court  of  the  United 
States,  in  a  suit  brought  for  that  purpose  by  the  Comptroller 
of  the  Currency,  in  his  own  name,  before  the  association  shall 
be  declared  dissolved.  And  in  cases  of  such  violation,  every 
director  who  participated  in  or  assented  to  the  same  shall  be 
held  liable  in  his  personal  and  individual  capacity  for  all 
damages  which  the  association,  its  shareholders,  or  any  other 
person  shall  have  sustained  in  consequence  of  such  violation. 

General  Information  as  to  Duties. 

The  oath,  which  every  director  of  a  National  bank 
is  required  to  take  before  he  is  qualified  to  act  in 
that  capacity  requires  him,  among  other  things,  to 
swear  or  affirm  "  that  he  will,  so  far  as  the  duty  de- 
volves on  him,  diligently  and  honestly  administer 
the  affairs  of  such  association,  and  will  not  know- 
ingly violate,  or  willingly  permit  to  be  violated, 
any  of  the  provisions  of  this 'Title"  (/.  e.^  the  Na- 
tional-bank Act). 

As  a  director  receives  no  compensation  for  his 
services,  the  extent  to  \vhich  the  duty  of  adminis- 
tering the  affairs  of  the  bank  devolves  on  him  is  a 
matter  which  his  own  conscience  must  decide,  for 
the  law  imposes  a  penalty  on   him  only  for  such 


28  HAND-BOOK    FOR    BANK    OFFICEIRS. 

violations  of  the  law  as  he  "knowingly"  commits, 
or  "knowingly"  permits  any  of  the  employes  to 
commit. 

This  being  the  case,  it  would  not  be  a  difficult 
matter  for  a  director  to  avoid  incurring  any  legal 
liability  by  habitually  absenting  himself  from  meet- 
ings of  the  board  and  from  the  bank,  and  generally 
keeping  himself  out  of  the  way  of  information  with 
regard  to  the  bank's  affairs,  and  the  only  incentive 
such  a  director  would  have  to  restrain  him  from 
pursuing  this  course  would  be  his  interest  in  $i,ooo 
of  stock  in  the  bank,  which  every  director  is  com- 
pelled by  law  to  own  in  his  own  right. 

Such  instances  as  this  are,  no  doubt,  extremely 
rare,  yet,  at  the  same  time,  it  is  certain  that  in  a 
measure  the  same  bad  results  are  attained  through 
indifference  and  carelessness  on  the  part  of  directors, 
arising  from  a  wrong  conception  of  their  duty  to 
the  stockholders,  whose  interests  they  are  pre- 
sumed to  represent,  and  also  from  their  ignorance 
of  che  law  governing  the  bank  whose  affairs  they 
are  chosen  to  administer. 

Directors  do  not,  perhaps,  always  realize  to  what 
extent  the  stockholders  are  compelled  to  rely  upon 
tnem  for  seeing  that  the  capital  they  invest  is  used 


DUTIES   OF    DIRECTORS.  29 

profitably  and  honestly,  but,  as  a  matter  of  fact, 
outside  of  sucli  information  as  the  officers  may  be 
disposed  to  furnish  them,  the  only  reliable  data  as 
to  the  bank's  affairs  accessible  to  stockholders  are 
those  furnished  by  the  sworn  reports  of  condition, 
which  are  published  in  the  newspapers  five  times  a 
year. 

When  this  responsibility  to  stockholders  is  fully 
realized,  it  would  seem  that  a  prudent  and  consci- 
entious man  of  business  would  hesitate  to  act  as 
director,  unless  he  intended  to  inform  himself  as  to 
his  duties,  and,  having  done  this,  to  "diligently 
and  honestly  administer  the  aff"airs  of  the  bank." 

Such  a  director  will  inquire  how  he  may  most 
readily,  and  without  too  much  research,  acquire 
such  reliable  information  as  will  enable  him  to  dis- 
charge his  duties  intelligentl}^ ;  and  partl}^  with  a 
view  to  furnishing  in  concise  form  and  plain  terms 
some  of  the  information  needed  this  little  work  has 
been  prepared,  embracing  only  such  subjects  as 
most  commonly  present  themselves  to  bank  officers 
in  the  regular  current  of  business. 

The  construction  of  law  and  rules  of  practice 
here  given  are  those  which  at  present  seem  to  ob- 
tain in  the  Comptroller  of  the  Currency's  office  as 


30  HAND-BOOK    FOR   BANK    OFFICERS. 

the  outcome  of  information  and  experience  accumu- 
lated during  a  quarter  of  a  century,  from  intimate 
and  constant  of&cial  intercourse  with  the  banks, 
supplemented  by  careful  examination  of  all  legal 
decisions  bearing  on  their  operations.  In  this  con- 
nection it  is  suggested  that  in  all  cases  of  doubt  as 
to  a  proper  construction  of  law,  or  as  to  correct  and 
sound  practice,  directors  or  other  bank  officers 
should  promptly  apply  for  information  to  the 
Comptroller's  office,  as  in  doing  so  they  obtain  the 
benefit  of  a  large  experience  gained  in  dealing  with 
the  affairs  of  over  3,300  banks. 

How  Directors  should  be  Chosen. 

The  law  relating  to  this  subject  is  contained  in 
sections  5145,  5148,  and  5149,  and  is  so  explicit  as  to 
leave  but  little  room  for  misunderstanding.  Great 
care  should  be  taken,  however,  to  see  that  all  the 
details  therein  prescribed  are  carried  out  with  pre- 
cision, as  the  failure  to  do  this  in  any  one  particular 
might,  under  certain  circumstances,  permit  the 
raising  of  some  question  as  to  the  validity  of  acts 
performed  by  the  directors  capable  of  being  decided 
by  the  courts  adversely  to  the  interests  of  such 
directors,  or  of  the  stockholders  whom  they  repre- 
sent. 


DUTIES   OP   DIRECTORS.  3 1 

Scope  of  Powers  conferred  upon  Directors;  Specific 
Duties. 

Paragraphs  6  and  7,  section  5136  (see  page  9, 
National-bank  Act,  edition  1888),  contain  a  sum- 
mary of  the  general  powers  conferred  by  statute 
upon  the  directors  of  a  National  bank,  and  prescribe 
how  some  of  these  powers  may  be  delegated  by 
them  to  the  officers  whom  they  appoint. 

Section  5145  (see  page  13,  National-bank  Act, 
1888),  in  prescribing  that  "the  affairs  of  each 
association  shall  be  managed  by  not  less  than  five 
directors,"  clearly  contemplates  that  its  affairs 
should  receive  the  constant  and  personal  super- 
vision of  the  board  as  a  whole,  or  where  this  is  not 
practicable,  that  it  should  be  accomplished  through 
committees  selected  from  their  number  chareed 
with  special  duties  in  this  respect. 

The  scrutiny  of  all  loans  and  discounts  made  is  a 
matter  which  should  always  receive  the  particular 
attention  of  the  board  as  a  whole,  or  of  its  com- 
mittee selected  specially  for  this  purpose,  but  per- 
haps the  most  important  duty  devolving  on  direc- 
tors is  that  of  making  a  thorough  and  searching 
examination  of  the  assets,  books,  and  accounts  of 
the  bank,  without  previous  notice,  at  reasonable 
intervals    between    the   dates   of  the   Government 


32  HAND-BOOK    FOR    BANK    OFFICERS. 

examiner's  visits.  These  examinations  should  be 
made  by  such  of  the  directors  as  are  most  familiar 
with  figures  and  expert  at  accounts,  otherwise  they 
will  not  always  disclose  the  actual  condition  of  the 
bank's  affairs. 

Every  bank  officer  and  clerk  who  is  faithfully 
discharging  his  duties  will  gladly  welcome  such  a 
verification  of  the  trust  confided  to  his  care,  and, 
through  fear  of  discovery  by  this  means,  the  would- 
be  dishonest  official  or  employe  may  be  restrained 
from  acts  ruinous  to  himself  and  detrimental  to 
the  interests  intrusted  to  his  keeping. 

As  directors  are  empowered  by  section  5136,  par. 
5,  to  ''require  bonds  of"  the  officers  whom  they 
appoint  "and  fix  the  penalty  thereof"  a  sufficient 
bond  should  be  required  of  every  officer  or  employe 
intrusted  with  the  keeping  of  valuables  or  of  the 
books  in  which  account  of  such  is  kept.  Such  a 
course  certainl}^  is  prudent  as  affording  to  stock- 
holders and  depositors  some  measure  of  protection 
against  official  negligence  or  dishonesty. 

In  this  connection  it  is  suggested  that,  as  the 
necessary  bonds  may  now  be  procured  from  com- 
panies specially  organized  for  the  purpose  of  fur- 
nishing such,  at  very  low  rates,  the  premium   on 


DUTIES   OF  DIRECTORS.  33 

these  bonds  might  be  paid,  and  in  some  instances 
is  paid,  by  the  bank,  instead  of  by  the  officers 
bonded. 

There  is  fully  as  much  reason  and  warrant  for 
paying  for  such  suret}^  or  guarantee  of  official 
integrity  as  there  is  for  the  paj^ment  of  premium  for 
insurance  of  the  bank  building  and  other  property 
against  the  risk  of  destruction  by  fire,  and  surel}^ 
there  is  no  question  as  to  the  duty  of  directors  in 
this  latter  case. 

Another  important  matter  demanding  their  at- 
tention is  of  course  the  provision  of  a  suitable,  con- 
venient, and  secure  office  in  which  the  business  of 
the  bank  may  be  carried  on  entirely  separate  and 
apart  from  any  other  business. 

It  is  also  necessary  that  a  fire-proof  and  burglar- 
proof  safe  should  be  provided  for  the  safe  keeping 
of  its  cash,  bills  receivable,  securities  and  other 
valuables,  and  also  of  its  books  and  records.  Where- 
ever  the  safe  will  not  accommodate  the  latter,  a 
suitable  fire-proof  and  burglar-proof  vault  for  them 
should  be  provided  in  addition  to  the  safe. 

Decisions  as  to  Liabilities;  What  would  constitute 
Violations  of  Law  "Knowingly"  Committed  or 
Permitted. 

With  regard  to  what  constitutes  violation  of  law 
''knowingly"  committed  or  permitted  by  a  director, 


34  HAND-BOOK    FOR   BANK   OFFICERS. 

resort  must  be  had  to  the  many  legal  decisions  on 
this  point,  two  of  the  most  recent  of  which  by  Fed- 
eral courts  are  those  in  the  cases  of  "  Movius  vs. 
Lee  (30  Fed.  Rep.,  298),"  and  "Witters  vs.  Sowles 
(31  Fed.  Rep.,  i)." 

For  general  and  reliable  treatment  of  this  sub- 
ject, reference  may  be  had  to  the  work  of  "Morse 
on  Banks  and  Banking,"  third  edition,  by  Parsons, 
chapter  IX,  where  these  two  and  other  leading 
decisions  are  referred  to. 

In  general  terms  it  would  seem  that  if  a  d'irector 
has  no  official  knowledge  of  a  violation  of  the  bank- 
ing law  he  is  not  to  be  held  personally  liable  for 
any  loss  or  damage  resulting  therefrom,  but  if,  at 
a  board  meeting  or  elsewhere,  he  officially  assents 
to  any  transaction  which  on  its  face  constitutes  a 
violation  of  law,  he  may  be  held  liable  personally 
for  any  resulting  loss  or  damage;  and  ignorance 
of  the  law  under  such  circumstances  could  not  be 
set  up  as  a  defense,  for  it  is  to  be  assumed  that  a 
person  acting  in  such  a  capacity  should  have  such 
a  correct  knowledge  of  the  law  under  which  he  acts 
as  is  readily  obtainable  by  a  practical  man  of  affairs. 


BOOKS,    ACCOUNTS,    AND   RECORDS.  35 


CHAPTER  III. 


BOOKS,  ACCOUNTS,  AND  RECORDS. 

One  of  the  essentials  of  successful  banking  is 
that  the  records  of  all  transactions  should  be  kept 
in  a  clear,  simple,  and  systematic  manner. 

The  number  and  character  of  books  for  keeping 
these  will  vary  with  the  volume  and  special  fea- 
tures of  the  business  done  b}^  each  bank,  but  cer- 
tain of  them  are  necessary  in  every  case,  and  of 
these  a  slight  sketch  is  here  given. 

A  book  should  first  be  provided  in  which  the 
minutes  of  all  meetings  of  stockholders  and  meet- 
ings of  directors  should  be  promptl}-  recorded,  giv- 
ing tersely  but  clearly  an  account  of  all  business 
transacted  at  such  meetings. 

All  certificates  of  stock  should  be  bound  in  book 
form,  with  a  stub  to  each  certificate,  upon  which 
stub  the  name  of  shareholder,  the  number  of  shares 
issued  to  him,  and  the  date  when  issued,  should  be  ' 
carefull}'  noted  before  the  certificate  is  detached. 
This  book  should  also  be  used  in  cases  of  all  trans- 
fers of  stock,  a  new  certificate  being  issued  in  the 


36  HAND-BOOK   FOR  BANK   OFFICERS. 

case  of  every  transfer,  made  out  in  the  name  of  the 
new  shareholder  in  place  of  the  original  certificate, 
which  should  be  taken  up  and  cancelled. 

All  transactions  shown  by  this  stock-certificate 
book  should  be  posted  to  the  stock  ledger^  which 
should  contain  a  separate  account  for  each  share- 
holder, so  kept  as  to  readily  show  at  any  time  the 
name  and  address  of  every  shareholder,  and  the 
number  of  shares  standing  in  the  name  of  each. 

Certificates  of  deposit^  like  stock  certificates, 
should  always  be  issued  from  a  book  with  a  stub  to 
each  for  noting  the  necessary  data.  The  practice 
of  noting  partial  payments  on  these  certificates  is 
apt  to  cause  confusion  in  accounts.  The  simpler 
and  better  wa}^  in  such  cases  is  to  take  up  and 
cancel  the  certificate  first  issued  and  issue  a  new 
one  for  the  reduced  amount.  The  custom  which 
some  ofi&cers  have  of  signing  these  certificates  in 
blank  before  they  are  needed  is  not  a  safe  one  and 
should  as  a  rule  be  avoided. 

Cashier's  checks  and  all  checks  and  d^^afts  on  other 
banks  and  bankers  should  also  always  be  issued 
from  a  book  having  a  stub  upon  which  the  neces- 
sary data  regarding  each  check  or  draft  drawn 
should  be  noted  before  it  is  detached. 


BOOKS,    ACCOUNTS,    AND    RECORDS.  37 

All  deposits  subject  to  check  should  be  posted 
daily  to  a  ledger,  showing  the  account  with  each 
depositor,  and  to  this  ledger  all  checks  drawn  against 
deposits  should,  of  course,  be  posted  daily  also,  in 
order  that  the  balance  of  any  depositor's  account 
may  be  readil 3^  ascertained. 

This  ledger,  generally  known  as  the  "individual 
ledger,"  should  be  balanced  at  least  once  a  month, 
and  at  the  same  time  all  depositors'  pass-books 
should  be  balanced  and  compared  with  the  ledger, 
and  all  differences  looked  up  and  reconciled. 

It  is  the  custom  with  some  banks  to  send  to  each 
depositor,  at  intervals,  a  statement  exhibiting  the 
balance  of  his  account,  as  shown  by  the  books  of 
the  bank,  with  the  request  that  he  verify  this  bal- 
ance by  his  pass-book  and  return  the  statement  to 
the  bank,  and  this  method  serves  to  develop  errors 
and  sometimes  false  entries  on  the  books  of  the 
bank. 

In  the  same  way  all  current  accounts  with  other 
banks  and  bankers  should  be  verified  and  recon- 
ciled at  least  once  a  month. 

Appropriate  books  should  be  provided  for  record- 
ing all  loans  and  discounts,  or  "bills  receivable," 
showing  names  of  makers  and  indorsers,  acceptors, 


386427 


38  HAND-BOOK   FOR   BANK   OFFICERS. 

or  guarantors,  with  memoranda  of  all  collateral  se- 
curity lodged  with  same,  and  the  dates  on  which 
the  paper  is  made  as  well  as  those  upon  which  it 
will  mature. 

All  stocks,  securities,  judgments,  claims,  other 
real  estate  and  mortgages  owned,  and  other  assets, 
should  be  so  recorded  as  to  show  readily  a  detailed 
account  of  these  in  order  that  the  information 
needed  for  reports  of  condition  and  by  the  bank 
examiner  may  be  obtained  at  any  date  without 
difficulty. 

As  soon  as  paper  becomes  overdue  a  separate 
record  of  such  should  be  made,  and  when  any  over- 
due paper  passes  into  the  class  of  "  bad  debts  as  de- 
fined by  section  5204,"  such  items  should  again  be 
separated  from  other  overdue  paper.  Such  treat- 
ment of  all  overdue  paper  and  "  bad  debts  "  is  nec- 
essary in  order  that  these  items  may  be  held  under 
special  observation  and  that  the  information  re- 
quired by  reports  of  condition  may  readily  be  fur- 
nished. 

A  general  cash-book  should  contain  a  daily  record 
of  aggregate  transactions  in  the  various  general  ac- 
cou7its^  viz.,  deposits,  loans  and  discounts,  interest, 
exchange,  current  expenses,  etc.,  and  the  resulting 


BOOKS,    ACCOUNTS,    AND   RECORDS.  39 

balance  of  cash  on  hand,  showing  in  detail  the  va- 
rious items  of  which  this  balance  is  composed. 

The  placing  in  ''cash  itcms^''  of  such  items  as  past 
due  paper,  dishonored  checks,  or  drafts,  expense 
items,  etc.,  except  temporarily,  should  be  avoided, 
as  the  term  when  representing  such  assets  is  mis- 
leading. Items  of  this  character  should  be  trans- 
ferred to  appropriate  accounts,  and  "cash  items  " 
should  include  only  such  as  represent  readily  con- 
vertible value. 

All  items  entered  on  the  general  cash-book  should 
be  posted  daily  to  appropriate  accounts  on  'Oci^  gen- 
eral ledger^  the  daily  balances  of  which  should  be 
exhibited  on  a  statement  or  balance  book  for  the 
purpose  of  showing  in  condensed  form  the  resources 
and  liabilities  of  the  bank  and  the  condition  of  its 
lawful-money  reserve  from  day  to  day. 

A  form  for  such  a  daily  statement  is  offered  by 
way  of  suggestion  on  page  41. 

A  careful  review  of  all  the  assets  should  be  made 
frequently,  and  their  book  value,  as  far  as  practi- 
cable, adjusted  to  actual  values,  so  that  the  books 
and  reports  of  the  bank  may,  as  nearly  as  possible, 
represent  the  true  condition  of  its  affairs. 

During  recent  years  great  improvements  have 
been  made  in  the  methods  of  bank  book-keeping 


40  HAND-BOOK   I^OR   BANK   OFFICERS. 

with  the  result  of  simplifying  these  and  saving 
time  and  labor.  Information  as  to  these  may 
readily  be  obtained  from  leading  banking  periodi- 
cals, and  also  from  the  examiners  and  from  banks 
in  the  larger  cities  where  these  methods  have  been 
generally  adopted. 

In  conclusion,  it  is  suggested  that  it  is  all-im- 
portant that  the  accounts  and  books  of  a  bank 
should  be  posted  up  to  date,  as  far  as  this  may  be 
possible,  and  that  frequent  trial  balances  and  veri- 
fications are  very  necessary  for  the  purpose  of 
developing  and  rectifying  errors  which,  in  spite  of 
all  precautions  will  inevitably  occur. 


BOOKS,    ACCOUNTS    AND    RE;C0RDS. 


41 


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42  HAND-BOOK.    FOR    BANK    OFFICERS. 


CHAPTER   IV. 


GENERAL   BANKING   POWERS   CONFERRED   BY 
SECTION   5136,    PAR.    7. 

To  exercise  by  its  board  of  directors,  or  duly  authorized 
officers  or  agents,  subject  to  law,  all  such  incidental  powers 
as  shall  be  necessary  to  carry  on  the  business  of  banking; 
by  discounting  and  negotiating  promissory  notes,  drafts,  bills 
of  exchange,  and  other  evidences  of  debt;  by  receiving  de- 
posits; by  buying  and  selling  exchange,  coin  and  bullion;  by 
loaning  money  on  personal  security;  and  by  obtaining,  issu- 
ing, and  circulating  notes  according  to  the  provisions  of  this 
Title. 

Court  Decisions  Construing  These. 

As  it  is  very  important  to  know  what  powers  are 
granted  to  a  National. bank  under  its  charter,  the 
following  extracts  from  two  decisions  are  quoted,  as 
throwing  some  light  on  this  subject,  and  as  show- 
ing what  a  bank  may  safely  and  prudently  do  with- 
out exceeding  the  powers  clearly  granted  by  its 
charter. 

From  the  decision  of  the  Supreme  Court  of  Penn- 
sylvania, in  Fowler  z^s.  Scully,  in  1873  (Thomp- 
son's National  Bank  Cases,  p.  856),  we  quote,  as 
follows,  on  this  point: 


GENERAL   BANKING  POWERS.  43 

In  view  of  the  rule  of  interpretation  of  such  charters  given 
to  us  by  the  Federal  courts,  and  the  maxim  expressio  luiius 
est  excliisio  alterius,  the  argument  might  close  with  the  terms 
of  the  power  to  loan  money  on  personal  security;  for  agree- 
ably to  this  rule  and  maxim  no  other  securitj^  than  personal 
can  be  taken  for  money  lent.  This  is  the  law  of  the  bank's 
capacity  and  of  its  control.  It  accords  also  with  the  nature 
of  banking  as  a  business,  which  is  precisely  described  in  the 
language  of  the  law  itself ;  the  disco2inting  and  negotiating 
of  promissory  notes,  drafts,  bills,  and  other  evidences  of  debt 
(meaning,  of  course,  debts  ejusdem  ge7ieris,  such  as  checks, 
certificates  of  deposit,  etc.);  the  buying  and  selling  of  bills 
of  exchange,  bullion,  and  lending  of  money  on  personal  se- 
curity. The  reasons  are  manifest.  The  business  of  a  bank 
is  commercial,  not  that  of  dealing  in  real  estate,  brokerage, 
etc.  It,  therefore,  does  not  buy  and  sell  real  estate,  ground- 
rents,  mortgages,  stocks,  produce,  etc. 

And,  further,  from  United  State.s  Supreme  Court 
decision  (First  National  Bank  of  Charlotte  vs.  Na- 
tional Exchange  Bank  of  Baltimore,  Thompson's 
National  Bank  Cases,  p.  128),  as  follows  : 

Authority  is  thus  given  to  transact  such  a  banking  busi- 
'ness  as  is  specified,  and  all  incidental  powers  necessary  to 
carry  it  on  are  granted.  These  powers  are  such  as  are  re- 
quired to  meet  all  the  legitimate  demands  of  the  authorized 
business,  and  to  enable  a  bank  to  conduct  its  affairs  within 
the  general  scope  of  its  charter  safely  and  prudently.  This 
neces.sarily  implies  the  right  of  a  bank  to  incur  liabilities  in 
the  regular  course  of  its  business,  as  well  as  to  become  the 
creditor  of  others.      Its  own  obligations  must  be  met,  and 


44  HAND-BOOK    FOR    BANK    OFFICERS. 

debts  due  to  it  collected  or  secured.  The  power  to  adopt 
reasonable  and  appropriate  measures  for  these  purposes  is  an 
incident  to  the  power  to  incur  the  liability  or  become  the 
creditor.  Obligations  may  be  assumed  that  result  unfortu- 
nately, lyoans  or  discounts  may  be  made  that  can  not  be 
met  at  maturity.  Compromises  to  avoid  or  reduce  losses  are 
oftentimes  the  necessary  results  of  this  condition  of  things. 
These  compromises  come  within  the  general  scope  of  the 
powers  committed  to  the  board  of  directors  and  the  officers 
and  agents  of  the  bank,  and  are  submitted  to  their  judgment 
and  discretion,  except  to  the  extent  that  they  are  restrained' 
by  the  charter  or  by-laws.  Banks  may  do,  in  this  behalf, 
whatever  natural  persons  could  do  under  like  circumstances. 
To  some  extent  it  has  been  thought  expedient  in  the  Na- 
tional banking  act  to  limit  this  power.  Thus,  as  to  real  es- 
tate, it  is  provided  (Revised  Statutes,  sec.  5137;  13  Stat.,  107, 
sec.  28)  that  it  may  be  accepted  in  good  faith  as  security  for, 
or  in  payment  of,  debts  previously  contracted;  but,  if  ac- 
cepted in  payment,  it  must  not  be  retained  more  than  five 
years.  So,  while  a  bank  is  expressly  prohibited  (sec.  5201; 
13  Stat.,  no,  .sec.  35)  from  loaning  money  upon  or  purchas- 
ing its  own  stock,  special  authority  is  given  for  the  accept- 
ance of  its  shares  as  security  for,  and  in  payment  of,  debts 
previously  contracted  in  good  faith;  but  all  shares  purchased 
under  this  power  must  be  again  .sold  or  disposed  of  at  private 
or  public  sale  within  six  months  from  the  time  they  are  ac- 
quired. 

Qtiotation.s  from  this  decision  will  also  be  found 
in  paragraph  on  dealing  in  stocks  and  bonds  (p. 
50). 


GENERAL  BANKING   POWERS.  45 

Power  to  Borrow  Money;  Power  to  issue  Time  Cer- 
tificates of  Deposit. 

As  the  question  whether  a  National  bank  has 
the  power  to  borrow  money  involves  the  question 
as  to  its  right  to  issue  time  certificates  of  deposit, 
the  following  extracts  from  third  edition  of  "  Morse 
on  Banks  and  Banking,"  by  Parsons,  to  which  we 
are  indebted  for  quotations  made  on  other  topics  in 
this  work,  are  given  as  a  summary  of  judicial 
decisions  bearing  on  this  subject. 

Business  Pozvers.  Par.  51,  sec.  5.  As  invoh^ed  in  the 
power  to  receive  deposits,  a  bank  may  issue  certificates  of 
deposit,  which  in  Massachusetts  and  Pennsylvania  are  not 
regarded  as  negotiable  paper;  but  in  other  States  they  are 
considered  promissory  notes  (which  seems  clear  upon  any 
defini-ion  of  a  note  to  be  found  in  the  authorities),  negotiable 
under  the  same  limitations  as  notes 

They  are  used  to  save  carrying  money;  but  as  they  do  not 
pass  by  delivery,  but  only  by  indorsement,  they  are  not  in- 
tended to  circulate  as  money  in  the  sense  of  a  banking  law, 
such  as  the  National  or  New  York  law;  and,  therefore,  the 
prohibition  in  those  acts  of  issuing  notes  to  ciradate  as  money, 
other  than  those  provided  for  or  named  in  said  acts,  does  not 
interfere  with  the  power  of  a  bank  to  issue  certificates  of 
deposit. 

They  may  be  payable  on  demand  or  on  time,  if  the  circum- 
stances justify  the  bank  in  borrowing  on  time  (see  par.  63), 
unless  there  is  a  restriction  in  the  organic  law  or  by  statute. 
If  a  bank  can  not  issue  its  negotiable  promissory  note  on 
time,  neither  can  it  issue  a  negotiable  certificate  of  deposit  of 


46  HAND-BOOK    FOR    BANK    OFFICERS. 

this  description.  If  the  note  would  be  void,  so,  likewise,  is 
the  certificate.  If,  however,  the  bank  is  empowered  to  issue 
promissory  notes,  subject  only  to  the  restriction  that  it  shall 
issue  none  which  are  designed  to  pass  into  circulation  as  cur- 
rency, but  only  such  as  become  necessary  in  the  ordinary" 
course  and  conduct  of  its  affairs,  and  are  strictly  business 
paper,  then  it  may  issue  certificates  of  deposit,  whether  pay- 
able on  demand  or  otherwise,  subject  only  to  the  same  restric- 
tion. By  reason  of  the  ease  with  which  such  instruments 
may  be  used  for  circulation,  the  courts  have  often  been  rigid 
in  scrutinizing  them,  and  applying  the  strict  letter  of  the  law 
to  them;  but  they  have  never,  that  we  have  found,  substan- 
tially modified  or  departed  from  the  general  principles  above 
laid  down. 

Business  Powers.  Par.  63,  sec.  9.  So  far  as  it  is  involved  in 
receiving  deposits,  borrowing  is  a  part  of  banking,  but  bor- 
rowing strido  scnsu,  taking  a  loan  for  a  defiiiite  time,  instead 
of  one  payable  on  demand,  as  ordinary  deposits  are,  is  not  a 
part  of  the  business  of  banking,  nor  a  necessary  incident 
thereof  as  s.  contimcoiis  practice ;  but  (like  every  other  corpora- 
tion in  the  United  States)  a  bank  has  an  inherent  right  to 
borrow  money  whenever  it  is  reasonably  necessary  in  the 
proper  conduct  of  its  business,  unless  specially  restricted. 
The  privilege  is  the  child  of  necessity,  and  is  limited  by  the 
same  necessity  or  intrinsic  propriety  which  gives  it  birth. 
The  borrowing  must  be  incidental  to  the  legitimate  banking 
business  of  the  association,  otherwise  the  act  is  tiltra  vires; 
as  if  the  money  is  obtained  for  speculation.  Aside  from  the 
theory  of  law,  as  no  one  but  the  bank  can  well  judge  whether 
a  loan  is  reasonably  necessary  or  not,  the  practical  fact  is 
that  a  bank  can  borrow  money  whenever  it  wishes  to,  and,  if 
the  money  is  used  in  its  proper  business,  no  fault  will  be  found, 
and  even  if  wrongly  applied,  it  will  not  affect  the  validity 
of  the  loan  as  between  the  parties  ordinarily.     *     *     * 


GENERAL   BANKING   POWERS.  47 

The  right  to  borrow  money  is  also  clearl}'  im- 
plied in  section  5202,  which  fixes  the  limit  for  such 
borrowing  as  follows: 

No  association  shall  at  any  time  be  indebted,  or  in  any  way 
liable,  to  an  amount  exceeding  the  amount  of  its  capital  stock 
at  such  time  actually  paid  in  and  remaining  undiminished  by 
losses  or  otherwise,  except  on  account  of  demands  of  the  na- 
ture following: 

First.   Notes  of  circulation. 

Second.  Moneys  deposited  with  or  collected  by  the  asso- 
ciation. 

Third.  Bills  of  exchange  or  drafts  drawn  against  money 
actually  on  deposit  to  the  credit  of  the  association,  or  due 
thereto. 

Fourth.  Liabilities  to  the  stockholders  of  the  association 
for  dividends  and  reserve  profits. 

From  these  it  will  appear  that  a  bank  has  un- 
doubted right  to  borrow  money  whenever  it  be- 
comes necessary  to  do  so  in  the  regular  course  of 
business,  but  that  it  should  not  make  a  practice  of 
doing  so  continuously.  Whenever  it  becomes  nec- 
essary for  a  bank  to  borrow  money  habituall}^  in 
order  that  it  may  be  able  to  suppl}^  its  regular  cus- 
tomers with  accommodations,  it  is  evident  either 
that  its  resources  are  locked  up  in  inconvertible 
forms,  or  that  its  capital  is  insufficient. 

In  the  former  case,  ever}'  effort  should  be  made 
to  convert  its  assets  into  available  funds,  and  in 


48  HAND-BOOK    FOR   BANK   OFFICERS. 

the  latter  it  should  seek  to  increase  its  capital 
stock  to  the  extent  of  its  regular  needs,  for  it  is 
neither  safe  nor  prudent  to  allow  its  customers  to 
depend  for  accommodation  upon  funds  procured 
frequently  from  a  distance,  which  may  at  any  time 
be  withdrawn  by  the  lenders;  and,  further,  if  a 
bank  can  make  a  profit  by  regularly  lending  money 
for  the  use  of  which  it  has  to  pay  interest,  it  would 
seem  that  it  has  the  ability  to  make  the  invest- 
ment of  additional  capital  stock  profitable  to  those 
by  whom  it  may  be  contributed. 

In  conclusion,  this  power  of  a  bank  to  borrow 
money  is  one  that  should  be  exercised  only  by  the 
board  of  directors,  or  by  the  managers  of  the  bank 
with  the  special  sanction  and  approval  of  the  board. 
It  is  a  power  intended  for  use  in  cases  of  emergency 
only,  and  should  be  carefully  held  in  reserve  for 
such  occasions. 

Bills  Payable  Defined. 

It  is  a  question  with  a  bank  sometimes  to  deter- 
mine what  items,  if  any,  of  its  liabilities  should  be 
included  under  the  head  of  "  bills  payable"  on  its 
books,  and  in  its  reports  of  condition.  Strictly 
speaking,  all  deposits  with  a  bank  are  loans  to  it, 
and  the  marked  distinction   between  a  "deposit" 


GENERAL   BANKING   POWERS.  49 

with  a  bank  and  money  loaned  to,  or  borrowed  by,  it 
seems  to  consist  in  the  circumstance  that  a  "depos- 
it" usually  voluntarily  seeks  the  bank,  while  a  loan 
to  it  is  money  which  the  bank  seeks  to  borrow  for 
a  longer  or  shorter  period.  But  money  may  be 
borrowed  by  a  bank  either  on  the  condition  that  it 
is  returnable  to  the  lender  on  demand^  or  at  some 
fixed  future  date.  It  would  seem  that  this  then 
should  be  the  dividing  line  between  "deposits,"  or 
amounts  "  due  to  other  banks,"  and  "bills  payable," 
namely,  that  if  the  amount  borrowed  is  payable  to 
the  lender  only  at  some  fixed  future  date,  it  should 
be  entered  as  "bills  payable,"  but  if  payable  on 
demand^  as  "deposits"  or  "due  to  other  banks  or 
bankers."  In  the  latter  case  it  is  necessary  that 
reserve  should  be  maintained  on  the  amount  bor- 
rowed, as  is  required  on  all  liabilities  payable  on 
demand,  but  no  reserve  is  required  on  "bills  pay- 
able." It  matters  not  whether  money  is  borrowed 
by  a  bank  on  promissory  note,  certificate  of  deposit, 
open  account,  or  otherwise;  if  it  is  not  returnable 
on  demand  it  should  be  classed  as  "bills  payable." 

Post-Notes  Defined. 

It  has  at  times  been  questioned  whether  the  re- 
striction as  to  issuing  "post-notes"  contained  in 


50  HAND-BOOK   FOR  BANK   OFFICERS. 

section  5183  did  not  extend  to  the  issuing  of  time 
drafts,  time  certificates  of  deposit,  and  other  obli- 
gations of  the  bank  conditioned  for  payment  at 
some  future  time,  but  a  recent  court  decision  (Rid- 
dle vs.  National  Bank,  Butler,  Pa.,  27  Fed.  Rep., 
503)  has  declared  that  time  certificates  of  deposit 
are  not  to  be  regarded  as  "post-notes."  This  de- 
cision, considered  in  connection  with  the  well-settled 
principle  that  a  bank  has  the  right  to  borrow  money 
when  necessary,  would  make  it  appear  that  the 
term  "  post-notes  "  used  in  the  statutes  was  intended 
only  to  prevent  the  issue  of  such  notes  to  circulate 
as  money. 

Right  to   Deal  in  Stocks  and   Bonds  Denied  by  tiie 
Courts. 

With  regard  to  the  right  of  a  bank  to  deal  in 

s/oc/js,  the  Supreme  Court  (First  National  Bank  of 

Charlotte  z's.  National  Exchange  Bank  of  Baltimore, 

92  U.  S.,  122)  expressed  the  following  opinion: 

Dealing  in  stocks  is  not  expressly  prohibited;  but  such  a 
prohibition  is  implied  from  the  failure  to  grant  the  power. 
In  the  honest  exercise  of  the  power  to  compromise  a  doubtful 
debt  owing  to  a  bank,  it  can  hardly  be  doubted  that  stocks 
may  be  accepted  in  payment  and  satisfaction,  with  a  view  to 
their  subsequent  sale  or  conversion  into  money,  so  as  to 
make  good  or  reduce  an  anticipated  loss.  Such  a  transaction 
would  not  amount  to  a  dealing  in  stocks. 


GENERAL   BANKING   POWERS.  5 1 

In  support  of  this  decision  we  find  in  the  National- 
bank  Act  itself  internal  evidence  to  the  same  effect. 
Section  5154,  in  providing  for  the  conversion  of 
State  banks  to  National  banking  associations, 
makes  an  exception  in  the  matter  of  the  par  value 
of  the  shares  of  such  State  banks,  and  another  ex- 
ception with  regard  to  their  holding  stock  in  other 
banks  as  follows: 

And  any  State  bank  which  is  a  stockholder  in  any  other 
bank,  by  authority  of  State  laws,  may  continue  to  hold  its 
stock,  although  either  bank,  or  both,  nia^'  be  organized  under 
and  have  accepted  the  provisions  of  this  Title. 

The  only  reasonable  inference  to  be  drawn  from 
this  special  provision  of  the  law,  in  favor  of  State 
banks  converting  to  the  National  system,  is  that 
it  was  not  intended  that  National  banking  associa- 
tions— originally  organized  as  such — should  have 
the  power  to  purchase  and  hold  such  stocks  as 
investments. 

And  so  with  regard  to  the  right  of  a  bank  to  deal 
in  bonds.  We  quote,  as  follows,  from  the  decision  of 
a  Maryland  court  (Weckler  v.  First  National  Bank, 
42  Md.,  581): 

To  the  u.sual  attributes  of  banking,  consisting  of  the  right 
to  issue  notes  for  circulation,  to  discount  commercial  paper, 
and  to  receive  deposits,  this  law  adds  the  special  power  to 


52  HAND-BOOK    FOR    BANK    OFFICERS. 

buy  and  sell  exchange,  coin,  and  bullion;  but  we  look  in  vain 
for  any  grant  of  power  to  engage  in  the  business  charged  in 
this  declaration.  It  is  not  embraced  in  the  power  to  ' '  dis- 
count and  negotiate"  promissory  notes,  drafts,  bills  of  ex- 
change, and  other  evidences  of  debt.  The  ordinary  meaning 
of  the  term  ' '  to  discount "  is  to  take  interest  in  advance,  and 
in  banking  it  is  a  mode  of  loaning  money.  It  is  the  advance 
of  money  not  due  until  some  future  period,  less  the  interest 
which  would  be  due  thereon  when  payable.  The  power  to 
' '  negotiate ' '  a  bill  or  note  is  the  power  to  indorse  and  deliver 
it  to  another,  so  that  the  right  of  action  thereon  shall  pass  to 
the  indorsee  or  holder.  No  construction  can  be  given  to  these 
terms,  as  used  in  this  statute,  so  broad  as  to  comprehend  the 
authority  to  sell  bonds  for  third  parties  on  commission,  or  to 
engage  in  business  of  that  character.  The  appropriate  place 
for  the  grant  of  such  a  power  would  be  in  the  clause  confer- 
ring authority  to  "  buy  and  sell;  "  but  we  find  that  limited 
to  specific  things,  among  which  bonds  are  not  mentioned, 
and  upon  the  maxim  expressio  rinius  est  exclusio  alterius,  and 
in  view  of  the  rule  of  interpretation  of  corporate  powers  be- 
fore stated,  the  carrying  on  of  such  a  business  is  prohibited  ■ 
to  these  associations.  Nor  can  we  perceive  it  is  anywise  nec- 
essary to  the  purpose  of  their  existence,  or  in  any  sense  inci- 
dental to  the  business  they  are  empowered  to  conduct,  that 
they  should  become  bond-brokers,  or  be  allowed  to  traffic  in 
every  species  of  obligation  issued  by  the  innumerable  cor- 
porations, private  or  municipal,  of  the  country.  The  more 
carefully  thej^  confine  themselves  to  the  legitimate  business 
of  banking,  as  defined  in  this  law,  the  more  effectually  will 
they  subserve  the  purposes  of  their  creation.  By  a  strict  ad- 
herence to  that  they  will  best  accommodate  the  commercial 
community,  as  well  as  protect  their  shareholders.  Such  is 
our  construction  of  this  statute,  and  it  is  supported  by  the 


GENERAL  BANKING   POWERS.  53 

best  considered  authorities  and  the  decided  preponderance  of 
judicial  opinion  in  other  States. 

From  these  decisions  it  would  appear  that,  while 
it  is  lawful  for  a  bank  to  acquire  stocks  or  bonds  in 
good  {aiih/or  the  purpose  of  securing  debts  previously 
C07itracted^  the  power  to  "traffic"  in  them — that  is, 
to  buy  them  with  a  view  of  selling  them  at  a  profit — 
or  to  hold  them  as  investments,  is  not  among  the 
incidental  powers  enumerated  in  section  5136,  and 
is,  therefore,  a  power  which  it  has  no  legal  right  to 
exercise. 

From  the  general  tenor  of  the  law,  and  the  re- 
strictions therein  imposed,  and  the  construction 
placed  upon  the  law  by  numerous  court  decisions, 
it  would  appear  that  the  framers  of  the  law  in- 
tended to  prevent  the  banks,  as  far  as  possible, 
from  getting  their  assets  into  any  inconvertible 
form,  and  for  this  reason  the  restrictions  as  to  real 
estate  transactions  are  imposed. 

If  the  investment  of  their  resources  in  stocks  or 
bonds,  except  to  save  debts  previously  contracted^ 
would  have  the  same  effect  of  locking  up  their 
funds  as  do  investments  in  real  estate,  and  experi- 
ence proves  that  frequentl}'-  it  does,  then  it  would 
seem  that  such  investments  should  be  avoided  by 


54  HAND-BOOK   FOR   BANK   OFFICERS. 

all  bank  managers  who  desire  to  be  on  tbe  safe  side 
of  the  law. 

The  accumulation  of  a  large  fund  of  surplus  and 
undivided  profits  in  a  bank  which  it  is  unable  to 
invest  profitably  in  such  loans  and  discounts  as  are 
permitted  by  law,  make  it  apparently  necessary  for 
the  bank  to  purchase  stocks,  bonds,  and  other  se- 
curities as  investments  for  these  "surplus  funds" 
as  they  are  sometimes  termed,  in  order  that  the 
stockholders  may  realize  dividends  on  these  funds, 
and  this  will  account  mainly  for  the  large  holdings 
of  some  banks. 

It  would  seem,  however,  that  the  same  ends  could 
be  attained  if  these  surplus  funds  or  accumulated 
profits  were  distributed  in  dividends  to  the  stock- 
holders and  invested  by  them  in  the  same  securi-" 
ties,  either  as  individuals,  or  by  trustees  acting  for 
them  in  groups  or  as  a  whole,  and  such  a  course 
would  certainly  remove  any  question  as  to  the  le- 
gality of  such  investments  when  made  by  the  bank 
in  its  corporate  capacity. 

Purchasing  Commercial  Paper. 

It  is  the  custom  of  some  banks  to  purchase  com- 
mercial or  business  paper,  either  from  brokers  or 
from  the  actual  owners  of  such  paper  without  re- 


GENERAL  BANKING  POWERS.  55 

course  to  such  brokers  or  owners,  or  in  other 
words,  without  their  guarantee  or  indorsement. 
Whether  or  not  the  power  to  do  this  is  granted  by 
law  to  a  National  bank,  has  never  been  decided  by 
the  United  States  Supreme  Court,  and  the  decis- 
ions rendered  by  various  State  courts  have  been 
both  favorable  and  adverse  to  this  view.  (See 
"Morse  on  Banks  and  Banking,"  third  edition, 
by  Parsons,  pars.  72  and  73.) 

The  whole  question  appears  to  hinge  upon  the 
proper  definition  of  the  word  "negotiating"  occur- 
ring in  par.  7,  section  5136.  On  this  point,  as  on 
some  others,  the  National-bank  Act  appears  to  con- 
tain some  internal  evidence  as  to  the  intended 
meaning  of  this  term,  for  in  section  5200  w^e  find 
that  "the  discount  of  commercial  or  business 
paper  actually  owned  by  the  person  negotiating 
the  same"  is  excepted  from  the  limit  as  to  amount 
which  is  applied  to  direct  loans,  or  "  money  bor- 
rowed." As  used  in  this  section  it  is  clear  beyond 
question  that  the  word  "negotiating"  means  sim- 
ply "offering  for  discount,"  and,  as  elsewhere  sug- 
gested in  this  work,  the  evident  reason  for  the 
exception  of  such  discounted  paper  from  the  limit 
applying  to  "money  borrow^ed,"  was  that  it  was 


56  HAND-BOOK   FOR  BANK   OPF'ICKRS. 

of  course  presumed  that  the  person  actually  own- 
ing and  negotiating  such  paper  would  indorse 
it,  or  guarantee  its  payment  by  the  maker.  If 
this  view  is  incorrect  we  look  in  vain  for  any 
valid  reason  for  the  exception  made  in  its  favor. 

It  seems  not  unreasonable  to  assume,  therefore, 
that  the  word  "  negotiating,"  as  used  in  par.  7,  sec- 
tion 5136,  and  following  so  closely  after  the  word 
"discounting"  in  the  same  clause,  has  the  same  sig- 
nificance as  that  implied  in  section  5200,  and  that  it 
was  intended  to  confer  upon  a  bank  only  the  power 
to  "offer  for  discount"  or  to  "rediscount"  paper 
which,  under  the  power  granted  in  the  same  para- 
graph, it  had  already  "discounted." 

At  all  events,  so  long  as  this  point  is  not  defi- 
nitely adjudicated  by  the  Supreme  Court,  it  would, 
seem  to  be  the  safer  course  for  such  National  banks 
as  claim  the  right  to  exercise  this  power  to  purchase 
paper  without  indorsement  or  guarantee,  that  they 
should  consider  money  invested  under  such  cir- 
cumstances practically  as  "money  borrowed"  by 
the  makers  of  the  paper  or  as  direct  loans  to  them; 
and,  therefore,  should  limit  such  purchases  in  each 
and  every  case  to  an  amount  not  exceeding  one- 
tenth  part  of  their  capital  stock  as  prescribed  by 
section  5200. 


TEANS ACTIONS   IN   REAI<  ESTATE.  57 


CHAPTER  V. 


TRANSACTIONS  IN  REAI.  ESTATE. 

Sec.  5157.  A  National  banking  association  may  purchase, 
hold,  and  convey  real  estate  for  the  following  purposes,  and 
for  no  others: 

First.  Such  as  shall  be  necessar}^  for  its  immediate  accom- 
modation in  the  transaction  of  its  business. 

Second.  Such  as  shall  be  mortgaged  to  it  in  good  faith  by 
way  of  security  for  debts  previously  contracted. 

Third.  Such  as  shall  be  conveyed  to  it  in  satisfaction  of 
debts  previously  contracted  in  the  course  of  its  dealings. 

Fourth.  Such  as  it  shall  purchase  at  sales  under  j  udgments, 
decrees,  or  mortgages  held  by  the  association,  or  shall  pur- 
chase to  secure  debts  due  to  it. 

But  no  such  association  shall  hold  the  possession  of  any 
real  estate  under  mortgage,  or  the  title  and  possession  of  any 
real  estate  purchased  to  secure  any  debts  due  to  it,  for  a  longer 
period  than  five  j-ears. 

Restrictions  Imposed  by  Law. 

It  will  be  clearly  perceived  from  the  language  of 
this  section  that  the  only  purpose  for  which  a 
National  bank  may  lawfully  "  purchase,  hold,  and 
convey  real  estate"  (other  than  its  "banking  house") 
is  b\^  way  of  securit}^  for  "debts  previousl}-  con- 
tracted."    This  is  emphasized  by  the  use  of  the 


58  HAND-BOOK   FOR   BANK   OFFICERS. 

words  "and  for  no  others"  in  the  first  paragraph 
of  the  section,  and  altogether  the  intent  of  the 
statute  is  as  explicitly  expressed  as  plain  language 
.can  do  this,  yet  in  case  any  doubt  arises  as  to  this 
intent^  we  have  further  the  plain  construction  placed 
upon  it  by  the  Supreme  Court  in  the  decision 
already  quoted  on  page  44  in  the  following  lan- 
guage : 

Thus,  as  to  real  estate,  it  is  provided  (section  5137)  that 
it  may  be  accepted  in  good  faith  as  security  for,  or  in  paj^ment 
of,  debts  previously  contracted;  but  if  accepted  in  payment,  it 
must  not  be  retained  more  than  five  years. 

This  limit  of  five  years  was  probably  fixed  by 
the  framers  of  the  law  as  affording  ample  time  for 
disposing  of  such  real  estate. 

It  is  presumed  in  some  cases  where  a  bank  is' 
either  unable  or  unwilling  to  dispose  of  real  estate 
at  the  end  of  the  five-year  limit,  that  it  conforms  to 
the  legal  requirement  when  it  charges  the  value  of 
the  real  estate  .off  its  books,  but  this  is  a  mistaken 
view  of  the  law,  which  requires  that  the  title  to,  or 
mortgage  on,  real  estate  should  be  disposed  of,  and 
makes  no  reference  to  the  appearance  of  its  value 
among  the  assets  of  the  bank. 

In  some  cases  the  law  on  this  particular  point  of 


TRANSACTIONS  IN  REAL   ESTATE.  59 

holding  possession  is  construed  as  referring  to 
the  actual  occupancy  by  the  bank  of  the  real  estate 
for  which  the  bank  holds  title  or  mortgage.  It  is 
scarcely  necessary  to  state  that  the  word  "posses- 
sion" refers  to  the  holding  of  the  written  legal 
instrument  by  the  bank,  and  not  to  the  actual  occu- 
pancy by  the  bank  of  the  property  over  which  the 
title  or  mortgage  gives  it  legal  control. 

4 

Securities  Based  on  Real  Estate  Values. 

Besides  titles  and  mortgages,  however,  there  are 
so  many  other  forms  under  which  an  interest  in 
real  estate  may  be  acquired,  to  which  the  letter  of 
the  law  does  not  apply,  and  with  regard  to  the  hold- 
ing of  which  the  question  of  legality  will  arise,  that 
the  language  of  the  opinion  of  the  United  States 
Supreme  Court,  in  its  decision  in  the  case  of  Union 
National  Bank  vs.  Matthews  (98  U.  S.,  658),  is 
quoted  below  as  bearing  directly  on  this  question. 

The  court,  with  regard  to  section  5136,  which 
permits  a  bank  to  loan  money  "on  personal  secu- 
rity," said:  ■ 

Section  5136  does  not,  in  terms,  prohibit  a- loan  on  real 
estate,  but  the  inii:)lication  to  that  effect  is  clear.  What  is  so 
implied  is  as  effectual  as  if  it  were  expressed. 


6o  HAND-BOOK    FOR    BANK    OFFICEIRS. 

Passing  on  to  the  restrictions  imposed  by  section 
5137,  it  defined  the  object  of  these  as  follows: 

The  object  of  the  restrictions  (in  section  5137)  was  obviously 
threefold.  It  was  to  keep  the  capital  of  the  banks  flowing  in 
the  daily  channels  of  commerce,  to  deter  them  from  embark- 
ing in  hazardous  real  estate  speculations,  and  to  prevent  the 
accumulation  of  large  masses  of  such  property  in  their  hands 
to  be  held,  as  it  were  "in  mortmain."  The  intent,  not  the 
letter  of  the  statute,  constitutes  the  law. 

With  this  language  in  view,  it  would  appear 
that  the  holding  of  real  estate  in  any  form  ex- 
cept for  the  purposes  clearly  stated  in  section 
5137  should  be  carefully  avoided  by  all  bank 
managers  who  desire  to  conform  to  the  "intent 
of  the  statute." 

For  this  reason,  the  holding,  as  investments^  of 
any  and  all  stocks,  bonds,  or  other  securities, 
the  value  of  which  rests  directly  upon  real  estate, 
except  to  save  debts  previously  contracted^  should 
be  regarded  by  such  managers  as  violations  of 
the  spirit  of  the  law,  if  not  of  its  letter. 

Some  of  the  forms,  other  than  deeds  and  mort- 
gages, in  which  real  estate  values  present  them- 
selves, are  the  following:  land  debenture  bonds; 
the  stocks  and  bonds  of  land  improvement  compa- 
nies, mortgage  and  trust  companies,  building  and 
loan  associations;    of  companies  whose  capital   is 


TRANSACTIONS   IN   REAL  ESTATE.  6 1 

wholly  invested  in  theatres,  opera-honses,  hotels, 
elevators,  cotton-presses,  warehouses,  and  the 
stocks  or  bonds  of  an}^  similar  enterprises  where 
the  capital  is  invested  mainly,  or  entirely,  in 
real  estate. 

In  connection  with  this  subject  of  holding  or 
dealing  in  real  estate  securities,  what  is  said  else- 
where with  regard  to  dealing  in  stocks  and  bonds 
generally  (page  51)  should  also  be  taken  into  con- 
sideration. 

As  such  stocks,  bonds,  and  other  securities  of 
like  nature,  though  depending  largely  or  entirely 
upon  real  estate  for  their  value,  are  personal  secu- 
rity^ the  holding  of  them  as  collaieral  security  for 
loans  appears  to  be  warranted  by  law,  which  per- 
mits "the  loaning  of  money  on  personal  security." 
(Section  5136.) 
Supreme  Court  Decisions. 

With  regard  to  making  loans,  secured  by  pledge 
of  notes  or  bonds  secured  by  liens  on  real  estate 
(such  as  mortgages,  deeds  of  trust,  and  the  like) 
as  collateral  security  for  such  loans,  the  Supreme 
Court,  in  the  case  of  Union  National  Bank  vs. 
Mattheivs^  already  referred  to,  decided  that  the 
taking  of  such  collateral  security  is  not  unlaw- 
ful,   inasmuch    as     the    mortgage    or    its    equiva- 


62  HAND-BOOK    FOR   BANK   OFFICERS. 

lent   in    such     cases     does     not    run     directly    to 
the  bank,  but  to  the  borrower. 

In  the  Matthews  case,  the  court  was  asked 
to  decide  as  to  the  legality  of  the  following 
transaction : 

A  National  bank  loaned  a  mercantile  firm  $15,000 
on  its  promissory  note.  The  firm  assigned  to  the 
bank,  as  collateral  security  for  this  loan,  a  note  for 
a  like  amount  made  by  two  persons  in  favor  of  the 
firm,  which  note  was  secured  by  a  deed  of  trust  on 
real  estate,  executed  by  one  of  the  makers  of  the 
collaters.1  note.  The  firm  failed  to  repay  their  loan 
at  maturity,  and  the  bank  proceeded  to  realize  upon 
the  real  estate^  whereupon  the  maker  of  the  deed 
attempted  to  enjoin  the  bank  from  doing  this, 
"upon  the  ground  that  the  loan  was  made  upon 
real  security,  which  was  forbidden  b}^  the  statute." 

The  court  decided  that  the  loan  was  not  unlawful, 

and  the  grounds  upon  which  it  reached  its  decision 

on  this  point  are  given  in  the  following  passage 

from  its  decision  in  the  case  of  National  Bank  vs. 

Whitney  (103  U.  S.,  99),  in  which  the  court  clearly 

restated  the  Matthews  case,  and  used  the  following 

language : 

In  coming  to  this  conclusion  this  court  considered  the 
transaction  in  two  aspects:  first,  as  not  being  within  the  let- 


TRANSACTIONS   IN   REAL   ESTATE.  63 

ter  of  the  statute,  because  the  deed  of  trust  was  not  executed 
to  the  bank.     *     *     * 

Viewed  in  the  first  aspect,  the  court  held  that,  as  a  mort- 
gage, the  deed  of  trust  was  merely  an  incident  to  the  note, 
and  a  right  to  its  benefit,  whether  it  was  delivered  or  not 
with  the  note,  passed  with  the  transfer  of  the  latter.  If  the 
loan  had  been  made  upon  the  note  alone,  the  benefit  of  the 
deed  as  a  mortgage  would  have  inured  to  the  bank  by  oper- 
ation of  law.  Of  course,  that  which  the  law  would  give 
independently  of  a  direct  transfer  by  the  mortgagee,  the 
statute  did  not  intend  to  defeat,  because  such  transfer  was 
made. 

The  decision  appears  to  have  been  based  upon 
the  view,  first,  that  the  collateral  note,  even  though 
secured  by  the  deed  of  trust,  ^2JS,  personal  security; 
and,  secondly,  that  the  deed  of  trust  (which  it  re- 
garded as  the  equivalent  of  a  mortgage)  was  not 
executed  directly  io  the  bank. 

In  making  loans  on  such  collateral  security, 
however,  the  object  of  the  restrictions  contained  in 
section  5137,  and  the  "intent  of  the  statute,"  as 
defined  by  the  Supreme  Court  in  the  Matthews 
decision,  should  always  be  held  in  mind;  and  the 
decision  of  the  court  in  this  case  is  not  to  be  con- 
strued as  warranting  loans  on  such  securit}^,  which 
do  not  in  reality,  as  well  as  in  appearance,  fully 
conform  to  the  actual  conditions  of  the  case  upon 
which  the  decision  was  rendered. 


64  HAND-BOOK    FOR   BANK   OFFICERS. 


CHAPTER  VI. 


RESTRICTIONS  AS  TO  LOANS  IMPOSED  BY  SEC- 
TION  5200. 

Sec.  5200.  The  total  liabilities  to  any  association,  of  any 
person,  or  of  any  company,  corporation,  or  firm  for  money 
borrowed,  including,  in  the  liabilities  of  a  company  or  firm, 
the  liabilities  of  the  several  members  thereof,  shall  at  no  time 
exceed  one-tenth  part  of  the  amount  of  the  capital  stock  of 
such  association  actually  paid  in.  But  the  discount  of  bills 
of  exchange  drawn  in  good  faith  against  actually  existing 
values,  and  the  discount  of  commercial  or  business  paper 
actually  owned  b}^  the  person  negotiating  the  same,  shall  not 
be  considered  as  money  borrowed. 

Examples  Illustrating  Excessive  Loans  and  Such  as 
are  Not  Excessive. 

There  is  probably  no  section  of  the  National- 
bank  Act  that  leaves  more  doubt  as  to  its  true  and 
exact  application  than  this  which  prescribes  a  limit 
to  loans. 

As  far  as  the  iJitent  of  the  framers  of  this  section 
can  be  divined  it  appears  to  make  a  distinction  be- 
tween "loans"  and  "discounts."  The  restriction 
is  limited  to  "money  borrow^ed"  by  an}?-  "person," 
"company,"  "corporation,"  or  "firm,"  including  in 
the  liabilities  of  a  company  or  firm  for  money  bor- 


RESTRICTIONS   AS   TO   LOANS.  65 

rowed,  the  liabilities  of  the  several  members  thereof, 
and  ill  order  to  determine  whether  a  "loan"  is  ex- 
cessive or  not,  it  is  important  to  know  who  gets  the 
benefit  of  the  "money  borrowed"  from  the  bank. 

The  paper  npon  which  loans  are  made  varies  so 
mncli  in  form  that  nothing  but  the  knowledge  of 
the  actual  facts  connected  with  each  transaction 
can  enable  the  officers  of  a  bank  to  determine 
whether  or  not  they  are  violating  this  section  of  the 
law. 

The  number  of  phases  in  which  the  question 
presents  itself  to  a  bank  is  almost  limitless,  but  a 
few  examples  are  given,  by  way  of  illustration, 
which,  it  is  hoped,  will  make  the  general  meaning 
more  clear  than  it  appears  from  the  text. 

I.  Taking  a  bank  with  a  capital  of  $100,000  act- 
ually "paid  in,"  and  assuming  that  the  firm  or 
company  of  John  Smith  &  Co.  wishes  to  "borrow 
money"  from  the  bank,  up  to  the  limit,  it  would  not 
be  lawful  to  loan  them  more  than  $10,000  (one- 
tenth  of  the  "capital  stock");  and  the  fact  that 
John  Smith  &  Co.  were  able  to  give  the  strongest 
and  best  indorsers  for  an  amount  greater  than 
$10,000,  or  to  put  up  collateral  securit}^  of  ample 
and  undoubted  market  value,  would  not  entitle  them 


66  HAND-BOOK    FOR    BANK    OFFICERS. 

lawfully  to  borrow  one  dollar  more  than  $10,000,  as 
the  law  makes  no  exception  in  such  cases,  the  limit 
applying  solely  to  the  amount  of  the  loan  without 
reference  to  its  security. 

2.  If,  before  the  firm  applied  for  a  loan,  John 
Smith  or  any  one  partner  had  borrowed  $10,000 
for  his  individual  benefit^  then  it  would  not  be  law- 
ful to  loan  anything  to  the  firm,  for  their  limit  for 
"money  borrowed"  would  have  already  been  ex- 
hausted by  the  loan  to  such  member  of  the  firm. 

3.  It  is  questionable  whether  it  would  be  lawful 
in  such  a  case  for  the  bank  to  loan  any  money  on  the 
paper  of  any  person,  firm,  or  corporation,  with  John 
Smith  &  Co.,  as  indorsers  of  such  paper,  if  it  were 
known  that  John  Smith  &  Co.  were  directly  tO  get 
the  benefit  of  the  money  so  borrowed,  for  this  would 
appear  to  be  an  evasion  of  the  law ;  but  if  any  per- 
son, firm,  or  corporation,  whose  paper  was  indorsed 
by  John  Smith  &  Co.,  wanted  to  borrow  money  on 
such  paper  for  his  or  its  individual  benefit,  the  fact 
that  it  was  indorsed  by  John  Smith  &  Co.  would 
not  make  a  loan  to  such  person,  firm,  or  corpora- 
tion unlawful. 

4.  In  case  John  Smith  &  Co.,  as  a  firm,  had  bor- 
rowed no  money  of  the  bank  it  would  be  lawful  to 


RESTRICTIONS    AS   TO   LOANS.  67 

loan  to  each  member  of  the  firm,  upon  his  individual 
credit  and  responsibility,  an  amount  equal  to  the 
limit,  provided  the  money  so  borrowed  by  each 
partner  was  for  his  individual  benefit,  and  not  for 
the  benefit  of  the  firm. 

5.  Again,  if  John  Smith  &  Co.  had  "borrowed 
money"  up  to  the  limit,  and  any  other  person,  firm, 
or  corporation  should  choose  to  borrow  money  of 
the  bank  upon  his  or  its  own  responsibility  and 
credit,  it  would  be  lawful  for  any  such  person, 
firm,  or  corporation,  to  let  John  Smith  &  Co.  have 
the  benefit  of  the  money  so  borrowed.  It  is  no 
affair  of  the  bank  to  know  what  disposal  is  made 
by  the  borrower  of  the  money  borrowed. 

6.  It  sometimes  happens  that  several  different 
firms  have  one  or  more  partners  in  common,  and 
the  question  will  arise  whether  it  is  lawful  to  loan 
each  one  of  the  firms  an  amount  equal  to  the  limit. 
In  such  a  case  it  would  seem  that  if  such  firms  are 
doing  business  entirely  upon  the  capital  owned 
solely  by  such  common  partner,  or  partners,  they 
should  be  regarded  virtually  as  one  firm,  and  the 
total  of  loans  to  them  should  not  exceed  the  limit; 
but  if  each  of  the  different  firms  really  represents 
separate  and  distinct  capital  invested  in  its  business, 


68  HAND-BOOK    FOR   BANK   OFFICERS. 

it  appears  that  loans  up  to  the  limit  may  lawfully 
be  made  to  each  firm. 

Deposits   with     Banks    and     Bankers    regarded    as 
Loans. 

Amounts  on  deposit  with  State  and  private  banks 
and  bankers  in  excess  of  one-tenth  of  the  capital 
stock,  have  always  been  held  by  the  Comptroller's 
of&ce  to  be  violations  of  this  section  also,  for  the 
following  reasons : 

In  the  decision  of  Bank  vs.  Lanier  (ii  Wallace, 
369),  which  was  on  some  other  point  of  law,  the 
Supreme  Court  pronounced  the  following  opinion 
as  to  "deposits,"  viz.: 

But  a  deposit  is  nothing  but  a  loan  of  money.  *  *  * 
It  is  well  known  that  country'  banks  keep  on  deposit  in  New 
York  with  bankers  and  merchants  a  considerable  amount  of 
money  for  their  own  convenience,  for  which  they  receive 
more  or  less  of  interest.  But  whether  interest  be  obtained 
or  not,  these  deposits  are,  equally  with  paper  discounted  over 
the  counter  of  the  bank,  loans  of  money,  and  the  reason  of 
the  rule  is  equally  applicable  to  them.  The  banker  is  ac- 
countable for  the  deposits  he  receives  as  a  debtor,  and  the 
individual  borrower  of  money  from  the  bank  sustains  no 
other  relation  to  it.  In  both  cases  money  is  borrowed,  to  be 
returned  in  a  greater  or  less  period  of  time,  according  to  the 
contract  of  the  parties. 

In  this  view  of  the  case,  deposits  are  loans,  and 
as  a  State  bank,  a  private   bank,  or  a  banker  is 


RESTRICTIONS   AS   TO   LOANS.  69 

either  a  person,  a  company,  a  corporation,  or  a  firm, 
any  deposit  with  any  such  person,  company,  cor- 
poration, or  firm  is  regarded  as  a  loan,  or  "money 
borrowed,"  and  is  subject  to  the  restriction  as  to 
amount,  which  is  prescribed  by  section  5200.  It 
ma}^  be  that  the  courts  would  not  hold  that  amounts 
in  excess  of  the  limit  sent  to  such  banks  or  bankers 
for  collection  are  to  be  regarded  as  in  violation  of 
law,  but  measures  should  be  taken  to  reduce  such 
amounts  within  the  limit  as  soon  as  it  is  ascer- 
tained that  the  collections  have  been  made  b}^  the 
bank  or  banker  receiving  the  same. 

Exceptions   as   to    Discounts   and    Examples    Illus- 
trating These. 

Coming,  then,  to  the  case  of  "discounts,"  which 

are  excepted  from  the  restriction  as  to  amount,  two 

exceptions  are  made,  as  follows : 

"  I.  The  discount  of  bills  of  exchange  drawn  in  good  faith 
against  actually  existing  values;"   and, 

"2.  The  discount  of  commercial  or  business  paper  actually 
owned  by  the  person  negotiating  the  same." 

Such  paper  as  is  clearly  embraced  in  these  two 
classes,  the  law  says,  "shall  not  be  considered  as 
money  borrowed,"  and  is,  therefore,  to  be  excepted 
from  the  restriction  as  to  amount. 


70  HAND-BOOK    FOR   BANK   OFFICERS. 

As  an  illustration  under  the  first  exception,  if 
the  firm  of  John  Smith  &  Co.,  who  had  already 
"  borrowed  money  "  to  the  extent  of  the  limit,  should 
offer  the  same  bank  bills  of  exchange  drawn  against 
shipments  of  cotton,  wheat,  corn,  iron,  or  any  other 
merchandise  which  is  readily  convertible  into 
money,  it  would  be  lawful  for  the  bank  to  discount 
such  paper  to  any  limit  which  it  considered  safe. 
Such  bills  or  drafts  are  generally  secured  by  the 
attachment  of  bills  of  lading  for  the  shipments 
against  which  the  bills  are  drawn,  but  if  the  bank 
is  satisfied  of  the  actual  existence  of  the  values 
and  with  the  good  faith  of  the  parties  to  the  trans- 
action, the  security  of  bills  of  lading,  though 
desirable,  is  not  absolutely  essential. 

With  regard  to  the  scope  of  the  second  excep- 
tion, it  will  be  assumed,  for  the  sake  of  example, 
that  the  firm  of  John  Smith  &  Co.,  who  have 
already  "borrowed  money"  up  to  the  legal  limit, 
offer  to  the  same  bank  for  discount  paper  which 
they  have  taken  from  their  customers  either  for 
merchandise  sold,  money  loaned,  or  other  valuable 
consideration.  In  such  a  case,  if  John  Smith  & 
Co.  are  the  bona  fide  owners  of  such  paper,  the 


rkstrictions  as  to  loans.  7t 

bank  may  discount  it  for  John  Smith  &  Co.  as 
"commercial  or  business  paper  actually  owned  by 
the  person  negotiating  the  same"  to  an}'  limit 
which,  in  the  judgment  of  the  directors  of  the  bank, 
it  may  be  considered  safe  to  do  so. 

Again,  if  the  business  paper  of  John  Smith  & 
Co.  were  offered  to  the  bank  for  discount  by  any 
person,  firm,  company,  or  corporation  actually 
owning  such  paper,  it  would  be  lawful  for  the  bank 
to  discount  the  same,  although  John  Smith  &  Co. 
had  already  "borrowed  money"  of  the  bank  to  the 
legal  limit. 

It  would  seem  that  the  intent  of  the  framers  of 
this  section  was,  using  a  homel}'  phrase,  to  prevent 
a  bank  from  putting  "  all  its  eggs  into  one  basket" 
by  making  direct  loans  to  any  one  person,  firm,  or 
corporation,  for  even  if  the  borrower  were  abun- 
dantly good,  or  could  lodge  with  the  bank  ample, 
undoubted  securit}^  for  the  "  money  borrowed,"  tlie 
loan  of  a  large  amount  to  any  one  part}-  able  to  offer 
such  security  might  operate  to  deprive  others  of 
their  due  share  of  the  benefits  afforded  b}'  a  bank, 
which  is  established  for  the  accommodation  of  the 
public  at  large. 


72  HAND-BOOK   FOR   BANK   OFFICERS. 

The  exceptions  noted  were  probably  made  be- 
cause the  transactions  covered  by  them  were  not 
only  regarded  as  being  generally  better  secured  by 
reason  of  the  guarantee  of  both  parties  to  such 
transactions,  but  also  because  in  this  way  the  bene- 
fits of  the  bank's  resources  would  be  better  dis- 
tributed to  the  public  for  whose  accommodation  it 
is  established. 

Overdrafts  are  Loans. 

Overdrafts  are  temporary  direct  loans  to  the 
parties  making  them,  or  "money  borrowed"  in  the 
least  desirable  form,  and,  as  such,  should  be  so  re- 
garded and  treated  in  computing  the  total  liabilities 
to  the  bank  of  any  person,  firm,  company  or  cor- 
poration for  "  money  borrowed." 


HOLDING   ITS   OWN  STOCK.  73 


CHAPTER  VII. 


RESTRICTIONS  WITH  REGARD  TO  A  BANK'S  AC- 
QUIRING AND  HOLDING  ITS  OWN  STOCK. 

'  Sec.  5201.  No  association  shall  make  any  loan  or  discount 
on  the  security  of  the  shares  of  its  own  capital  stock,  nor  be 
the  purchaser  or  holder  of  any  such  shares,  unless  such  se- 
curity or  purchase  shall  be  necessary  to  prevent  loss  upon  a 
debt  previously  contracted  in  good  faith;  and  stock  so  pur- 
chased or  acquired  shall,  within  six  months  from  the  time  of 
its  purchase,  be  sold  or  disposed  of  at  public  or  private  sale; 
or,  in  default  thereof,  a  receiver  may  be  appointed  to  close  up 
the  business  of  the  association,  according  to  section  5234. 

Penalty  for  Holding  beyond  Time  Limit. 

It  will  be  observed  that  the  law  provides  a  pen- 
alty which  may  be  summarily  applied  by  the 
Comptroller  to  an}^  violation  of  the  law  in  this  re- 
spect, and  the  reason  for  this  it  is  not  dif&cult  to 
find. 

Whenever  a  bank  uses  any  portion  of  its  capital 
to  make  a  loan  on  its  own  shares,  or  to  purchase 
them,  it  reduces  or  impairs  its  capital  stock  by  such 
an  amount,  and,  in  addition,  deprives  its  creditors 
of  the  additional  security  afforded  b}^  the  contingent 


74  HAND-BOOK    FOR    BANK    OFFICERS. 

liability  attaching  to  the  shares,  if  held  by  a  solvent 
shareholder. 

Violations  of  the  spirit  of  this  section,  if  not  of 
the  letter,  not  infrequently  occur  upon  the  organi- 
zation of  a  bank,  where  shareholders  are  allowed  to 
give  their  notes  for  a  portion  or  the  whole  of  their 
holdings,  without  being  required  to  lodge  their 
stock  with  the  bank  as  security,  in  direct  violation 
of  the  letter  of  the  law. 

Such  evasions  of  law  by  officers,  on  the  threshold 
of  a  bank's  career,  do  not  augur  well  for  its  future 
success,  which  must  depend  largely  upon  honest 
and  fair  dealing  with  all  parties  having  intercourse 
with  it. 

The  term  of  six  months,  during  which  a  bank  is 
allowed  to  hold  its  own  stock  taken  for  debt,  was 
probably  fixed  because  regarded  as  ample  time  in 
which  to  arrange  for  its  disposal. 


EARNINGS,  SURPLUS,  AND   DIVIDENDS.  75 


CHAPTER  VIII. 


EARNINGS,    SURPLUS,    AND   DIVIDENDS. 

Sec.  5199.  The  directors  of  any  association  may,  semi- 
annually, declare  a  dividend  of  so  much  of  the  net  profits  of 
the  association  as  they  shall  judge  expedient;  but  each  asso- 
ciation shall,  before  the  declaration  of  a  dividend,  carry  one- 
tenth  part  of  its  net  profits  of  the  preceding  half  year  to  its 
surplus  fund  until  the  same  shall  amount  to  twenty  per 
centum  of  its  capital  stock. 

Sec.  5204.  No  association,  or  any  member  thereof,  shall, 
during  the  time  it  shall  continue  its  banking  operations, 
withdraw,  or  permit  to  be  withdrawn,  either  in  the  form  of 
dividends  or  otherwise,  any  portion  of  its  capital.  If  losses 
have  at  any  time  been  sustained  by  anj^  such  association, 
equal  to  or  exceeding  its  undivided  profits  then  on  hand,  no 
dividend  .shall  be  made;  and  no  dividend  shall  ever  be  made 
b}'  an}'  association,  while  it  continues  its  banking  operations, 
to  an  amount  greater  than  its  net  profits  then  on  hand,  de- 
ducting therefrom  its  lo.sses  and  bad  debts.  All  debts  due  to 
any  a.ssociations,  on  which  interest  is  past  due  and  unpaid 
for  a  period  of  six  months,  unless  the  same  are  well  secured, 
and  in  process  of  collection,  shall  be  considered  bad  debts 
within  the  meaning  of  this  section.  But  nothing  in  this  sec- 
tion shall  prevent  the  reduction  of  the  capital  stock  of  the 
association  under  section  fifty-one  hundred  and  fort>  -three. 

Sec.  5212.  In  addition  to, the  reports  required  by  the  pre- 
ceding section,  each  a.ssociation  shall  report  to  the  Comp- 
troller of  the  Currency,  within  ten  days  after  declaring  any 


76  HAND-BOOK    FOR   BANK   OFFICERS. 

dividend,  the  amount  of  such  dividend,  and  the  amount  of 
net  earnings  in  excess  of  such  dividend.  Such  reports  shall 
be  attested  by  the  oath  of  the  president  or  cashier  of  the 
association. 

Legal  Requirements  regarding  Net  Profits  and  Sur- 
plus;  "Bad  Debts"  Defined. 

Section  5199  empowers  the  directors  to  declare  a 
dividend  semi-annnally,  if  the  "net  profits"  of  the 
bank  will  admit;  and,  as  there  appears  to  be  no  pro- 
hibition in  the  law  against  their  declaring  dividends 
oftener  than  this,  or  less  frequently,  they  are  per- 
mitted to  do  so,  provided  they  comply  with  all  the 
requirements  of  the  law  in  respect  to  surplus,  divi- 
dends, and  earnings.  Before  declaring  a  dividend 
it  is  necessary,  of  course,  to  know  whether  the  "net 
profits  "will  admit  of  this,  and  section  5204  requires 
that  "net  profits"  must  be  arrived  at  by  deducting 
from  gross  earnings,  or  "undivided  profits"  from 
all  sources,  the  following  items: 

1.  Expenses  and  taxes  paid. 

2.  Losses  which  have  been  sustained  from  any  cause. 

3.  The  amount  of  "bad  debts"  as  these  are  clearly  defined 
by  section  5204.  It  will  be  observed  here  that  these  debts, 
which  are  technically  "bad,"  are  not  to  be  confused  with 
those  which  are  known  to  be  actually  bad,  for  these  latter 
should  be  classed  with  ' '  losses  tustained ; ' '  but,  at  the  same 
time,  section  5204  requires  that  debts  which  are  "bad" 
technically  should  always  be  taken  into  account  in  comput- 


EARNINGS,  SURPI.US,  AND    DIVIDENDS.  77 

ing  net  profits  before  declaring  a  dividend,  whether  they  are 
charged  off  the  books  of  the  bank  or  not. 

Having  arrived  at  the  "net  profits  "  in  this  way, 
it  is  necessary  that  every»bank  whose  "surplus 
fund  "  is  less  than  20  per  cent,  of  its  capital  stock 
should,  before  declaring  a  dividend,  carr}'  at  least 
10  per  cent,  of  these  profits  to  this  fitnd  as  required 
by  section  5199.  The  bank  may,  if  it  so  desires, 
carry  to  the  fund  an  amount  greater  than  the  re- 
quired 10  per  cent,  of  its  "net  profits,"  but,  once 
this  is  done,  the  law  makes  no  provision  for  with- 
drawing the  excess  so.  carried  for  the  purpose  of 
declaring  a  dividend  so  long  as  the  surplus  is  less 
than  the  required  20  per  cent.  '^'Vhile  the  law  is 
entirel}^  silent  as  to  the  purposes  for  which  the 
surplus  is  created  and  may  be  used,  the  presump- 
tion is  that  the  object  of  its  accumulation  is  to 
provide  a  fund  for  meeting  unexpected  or  unusual 
losses  without  resorting  to  an  assessment  of  tlie 
stockholders,  in  case  such  losses  exceed  the  "un- 
divided profits"  on  hand  at  the  time;  and,  in  this 
view  of  the  subject,  a  bank  whose  surplus  is  20 
per  cent,  or  less  is  allowed  to  use  the  whole  or  a 
portion  of  it  to  make  good  such  losses,  but  only 
then  after  it  has  first  exhausted   all   of  its  "  undi- 


78  HAND-BOOK    FOR    BANK    OFFICERS. 

vided  profits"  on  hand.  In  such  a  case,  a  bank 
having  to  use  all  of  its  undivided  profits  for 
making  losses  good,  has,  of  course,  nothing 
wherewith  to  declare  a  dividend,  and  must  per- 
force pass  its  dividend  for  such  a  period.  As  soon 
thereafter,  however,  as  its  "  net  profits  "  will  admit, 
it  may  declare  a  dividend,  but  before  doing  this  it 
will  be  necessary  to  carry  one-tenth  of  such  profits 
to  the  surplus  fund,  which  has  been  reduced  below 
20  per  cent.,  and  to  continue  to  do  this  at  the  end  of 
each  dividend  period  until  this  fund  again  reaches 
the  required  limit  of  20  per  cent. 

Whenever  the  surplus  of  a  bank  exceeds  20  per 
cent,  of  its  capital,  it  is  lawful  for  the  directors  to 
use  the  excess  for  declaring  a  dividend  or  for 
making  losses  good,  and  in  this  latter  case  it  will 
not  be  necessary  to  pass  any  dividend,  provided 
the  excess  over  20  per  cent,  in  the  surplus  is  suffi- 
cient to  provide  for  such  losses. 

Legal  Requirements  with  regard  to  Reports  of   Div- 
idends and  Earnings;  How  to  Make  These  Up. 

As  section  5212  prescribes  that  "each  asso- 
ciation shall  report  to  the  Comptroller  of  the 
Currency  within  ten  days  after  declaring  any 
dividend,  the    amount  of  such  dividend,  and  the 


EARNINGS,  SURPLUS,  AND   DIVIDENDS.  79 

amount  of  net  earnings  in  excess  of  such  dividend," 
and  further,  that  "  such  reports  shall  be  attested  by 
the  oath  of  the  president  or  cashier  of  the  asso- 
ciation," it  is  necessary  that  banks  should  make 
reports  to  the  Comptroller,  not  only  at  their  regular 
semi-annual  dividend  periods,  but  also  of  any  quar- 
terly or  special  dividends  they  may  declare  between 
those  periods;  and,  in  order  to  comply  with  the 
requirements  of  the  law,  reports  of  any  such 
special  dividends  should  be  made  in  the  same 
form  as  reports  of  earnings  and  dividends  made 
at  the  regular  semi-annual  periods,,  so  as  to  show 
not  only  the  net  profits  on  hand  at  date  of 
previous  report,  but  also  the  gross  earnings  from 
all  sources  since,  as  well  as  deductions  for  all 
expenses  and  taxes  paid,  losses  incurred,  and 
"bad  debts,"  as  defined  by  section  5204.  Other- 
wise its  "net  earnings,  in  excess  of  such  divi- 
dend," can  not   be  truly  shown   by  the   report. 

In  making  such  special  dividend  reports,  it  is 
not  necessar}'-  that  a  bank  should  close  the  accounts 
on  its  books,  if  it  does  not  desire  to  do  so,  but  it  is 
essential  that  all  items  showing  profit  and  loss  for 
the  period  covered  by  the  report  should  be  fully 
entered  in  the  report. 


8o  HAND-BOOK    FOR    BANK   OFFICERS. 

Capitalization  of  Surplus. 

While  a  bank  having  a  surplus  equal  to,  or  less 
than,  the  required  20  per  cent,  may  not  be  permit- 
ted by  the  Comptroller  to  capitalize  such  surplus 
in  case  of  any  increase  of  its  capital,  any  bank 
having  a  surplus  exceeding  this  limit  is,  of  course, 
permitted  to  convert  the  amount  in  excess  of  the 
20  per  cent,  into  capital  if  it  so  desires,  for  such 
excess  practically  represents  "undivided  profits." 

Where  the  surplus  is  equal  to,  or  less  than,  20 
per  cent.,  the  original  shareholders  may,  however, 
utilize  a  portion  of  this  surplus  in  the  following 
manner: 

The  capital  being  $50,000,  the  surplus  $10,000, 
and  the  proposed  increase  $50,000,  the  ratio  of  the 
surplus  ($10,000)  to  the  increased  capital  ($100,000) 
will  be  10  per  cent.  If  the  new  stock  be  placed  at 
no  (its  true  value)  a  premium  of  $5,000  will  be 
realized  on  the  increase  when  sold,  which  premium 
should  properly  go  to  the  original  shareholders 
(the  owners  of  the  surplus)  who  in  place  of  the 
premium  so  collected  relinquish  to  the  new  share- 
holders a  corresponding  interest  in  the  surplus 
fund. 

The  rate  of  premium  in  any  given  case  may  be 
obtained  by  dividing  the  amount  of  surplus  by  the 
amount  representing  the  total  capital  stock  after 
the  proposed  increase  is  added. 


REPORTS  OF  CONDITION.  8 1 


CHAPTER  IX. 


REPORTS  OF  CONDITION  REQUIRED  BY  SECTION 

5211. 

Sec.  52 1 1 .  Every  association  shall  make  to  the  Comptroller 
of  the  Currency  not  less  than  five  reports  during  each  year, 
according  to  the  form  which  maybe  prescribed  by  him,  veri- 
fied by  the  oath  or  afiirmation  of  the  president  or  cashier  of 
such  association,  and  attested  by  the  signature  of  at  least 
three  of  the  directors.  Each  such  report  shall  exhibit,  in 
detail  and  under  appropriate  heads,  the  resources  and  liabili- 
ties of  the  associations  at  the  close  of  business  on  any  past 
day  by  him  specified;  and  shall  be  transmitted  to  the  Comp- 
troller within  five  days  after  the  receipt  of  a  request  or  requi- 
sition therefor  from  him,  and  in  the  same  form  in  which  it  is 
made  to  the  Comptroller  shall  be  published  in  a  newspaper 
published  in  the  place  where  such  association  is  established, 
or  if  there  is  no  newspaper  in  the  place,  then  in  one  pub- 
lished nearest  thereto  in  the  same  county,  at  the  expense  of 
the  association;  and  such  proof  of  publication  shall  be  fur- 
nished as  may  be  required  by  the  Comptroller.  The  Comp- 
troller shall  also  have  power  to  call  for  special  reports  from 
any  particular  association  whenever  in  his  judgment  the 
same  are  necessary  in  order  to  a  full  and  complete  knowledge 
of  its  condition. 

Sec.  5213.  Every  association  which  fails  to  make  and 
transmit  any  report  required  under  either  of  the  two  preceding 
sections  shall  be  subject  to  a  penalty  of  one  hundred  dollars 
for  each  day  after  the  periods,   respectively,   therein  men- 


82.  HAND-BOOK    FOR   BANK   OFFICERS. 

tioned,  that  it  delaj^s  to  make  and  transmit  its  report. 
Whenever  any  association  delays  or  refuses  to  pay  the  pen- 
alty herein  imposed,  after  it  has  been  assessed  by  the  Comp- 
troller of  the  Currency,  the  amount  thereof  may  be  retained 
by  the  Treasurer  of  the  United  States,  upon  the  order  of  the 
Comptroller  of  the  Currency,  out  of  the  interest,  as  it  may 
become  due  to  the  association,  on  the  bonds  deposited  with 
him  to  secure  circulation.  All  sums  of  money  collected  for 
penalties  under  this  section  shall  be  paid  into  the  Treasury 
of  the  United  States. 

AN      ACT 
Defining  the  Verification  of  Returns  of  National  Banks. 

Be  it  enacted  by  the  Senate  and  House  of  Representatives 
of  the  United  States  of  America  in  Congress  assembled^ 
That  the  oath  or  affirmation  required  by  section  fifty-two 
hundred  and  eleven  of  the  Revised  Statutes,  verifying  the 
returns  made  by  National  banks  to  the  Comptroller  of  the 
Currency,  when  taken  before  a  notary  public  properly  au- 
thorized and  commissioned  by  the  State  in  which  such 
notary  resides  and  the  bank  is  located,  or  any  other  officer 
having  an  official  seal,  authorized  in  such  State  to  admin- 
ister oaths,  shall  be  a  sufficient  verification  as  contemplated 
b):-  said  section  fifty-two  hundred  and  eleven :  Provided^ 
That  the  officer  administering  the  oath  is  not  an  officer  of 
the  bank. 

Approved  February  26,  1881. 

Information  with  regard  to  Same;  Filling  Out  Sched- 
ules. 

The  examination  of  five  reports  of  condition  a 
year  from  each  of  over  3,300  banks  necessarily 
involves  a  large  amount  of  correspondence  betw^een 


REPORTS   OF   CONDITION.  83 

the  Comptroller's  office  and  the  banks.  Much  of 
this  correspondence  relates  to  violations  of  law, 
such  as  excessive  loans,  loans  on,  and  investments 
in,  real  estate,  deficient  reserve,  etc.,  but  a  very  large 
proportion  is  made  necessary  by  omissions  on  the 
part  of  those  who  make  up  the  reports  to  fully  fill 
out  schedules  on  the  back  of  the  report,  and  a  little 
more  care  in  this  respect  would  relieve  the  banks 
from  the  trouble  and  annoyance  of  replying  to  the 
thousands  of  letters  which  are  addressed  to  them 
for  the  purpose  of  obtaining  information  which 
should  be  given  in  the  report  when  rendered. 

The  law  requires  the  banks  to  make  these  re- 
ports to  the  Comptroller  "  five  times  a  year,"  "ac- 
cording to  the  form  which  may  be  prescribed  by 
him,"  and,  under  this  authority,  he  calls  for  cer- 
tain information  in  the  schedules  on  the  back, 
which  it  is  important  to  have  in  order  to  know  the 
true  condition  of  each  bank,  and  whether  its  opera- 
tions are  conducted  in  conformity  to  law  or  not. 

When  it  is  remembered  that,  as  a  rule,  the  ex- 
aminer visits  each  bank  only  once  a  year,  it  is 
very  important  that  these  sworn  statements  of 
condition  should  be  full  and  complete  in  every  re- 
speqt.     In  very  many  cases  violations  of  law  and 


84  HAND-BOOK    FOR    BANK    OFFICERS. 

incorrect  practices,  which  occur  through  ignorance 
or  inexperience,  are  developed  by  these  reports, 
and  timely  warning  and  suggestion  from  the 
Comptroller's  office  are  all  that  is  necessary  to 
prevent  recurrence. 

The  items  which  are  most  frequently  omitted 
from  the  schedules  are  the  following: 

Bad  debts,  as  defined  by  section  5204,  Revised  Statutes. 

Other  suspended  and  overdue  paper. 

lyiabihties  of  directors  (individual  and  firm)  as  payers. 

Under  the  first  of  these  three  the  bank  is  re- 
quired to  state,  not  debts  that  are  actually  worth- 
less, but  all  such  as  are  technically  "bad  debts" 
as  clearly  defined  by  section  5204.  The  amount  of 
"bad  debts"  on  the  books  of  a  bank  has  a  very 
important  bearing  on  its  condition,  for  if  this 
exceeds  the  sum  of  its  surplus  fund  and  net  un- 
divided profits,  it  is  an  indication  that  its  capital 
may  be  impaired. 

The  schedule  of  "stocks,  securities,  judgments, 
claims,  etc.,"  should  clearly  show  the  different 
items  composing  the  total  of  these,  and  is  in- 
tended to  embrace  only  such  items  as  are  owned 
by  the  bank.  Any  such  items  held  as  collateral 
for  loans  should  not  be  entered   here,  but  in   the 


REPORTS   OF   CONDITION.  85 

appropriate  place  in  schedule  of  "loans  and  dis- 
counts." No  real  estate  items  should  be  entered 
here,  but  in  the  schedule  for  "  loans  and  discounts," 
if  held  as  collaterals,  and  in  schedule  for  "other 
real  estate  and  mortgages  owned,"  if  owned  by 
the  bank.  In  this  latter  schedule,  as  also  in  the 
schedules  provided  for  listing  "loans  and  dis- 
counts, secured  b}^  mortgages  or  other  real  estate 
security,"  it  is  important  to  state  Jiow  and  luJien 
such  investments  or  collaterals  were  acquired,  in 
order  to  show  whether  they  were  acquired  in  con- 
formity to  provisions  of  section  5137,  and  whether 
they  have  been  held  longer  than  five  years. 

In  a  great  many  cases  replies  from  the  banks 
show  that  no  entries  are  to  be  made  in  the  schedules 
left  blank,  but  as  it  is  impossible  to  infer  this  from 
the  face  of  the  report  in  the  case  of  bad  dchis^  over- 
due paper ^  liabilities  of  directors^  and  excessive  loans ^ 
it  is  necessary  to  address  a  letter  of  inquir}'  to  the 
bank  in  each  case.  For  this  reason  a  note  in  red 
ink  is  printed  conspicuousl}'  on  the  back  of  the 
report,  requesting  the  bank  to  "fill  all  schedules, 
writing  in  the  word  '  none '  wherever  no  amount  is 
to  be  entered." 


86  HAND-BOOK   FOR   BANK   OFFICERS. 

Verification  and  Attestation. 

After  seeing  that  a  report  of  condition  has  been 
properly  filled  out,  both  with  regard  to  the  items  of 
"  resources  "  and  "  liabilities  "  on  its  face  and  the 
schedules  on  the  back,  it  is  necessary  to  see  that  it 
is  signed,  sworn  to,  and  attested  as  required  by 
law.  It  must  be  signed  either  by  the  president  or 
cashier,  as  no  other  officer  is  e77tpowered  by  section 
^211  to  do  tJiis^  and  attested  by  three  directors,  as 
required  by  the  same  action.  The  officer  signing 
the  report,  if  a  director,  should  not  sign  in  attesta- 
tion of  his  own  signature,  as  it  is  hardly  to  be  sup- 
posed that  this  was  contemplated  by  the  law;  and 
finally  the  officer  signing  should  swear  to  it  before 
a  notary  public,  or  other  officer  having  an  of&cial 
seal,  and  authorized  to  administer  oaths,  as  required 
by  the  act  approved  Februar}^  26,  1881.  As  this 
act  provides  that  the  officer  administering  the  oath 
should  not  be  "an  officer  of  the  bank,"  the  oath 
should  not  be  administered  by  a  director  acting  in 
that  capacity,  for  the  reason  that  in  section  5497, 
enacted  prior  to  the  act  of  Februai;y  26,  1881,  a  di- 
rector is  evidently  regarded  as  an  officer^  inasmuch 
as  the  following  language  is  used:  " Every  presi- 


REPORTS   OF   CONDITION.  87 

dent,  cashier,  teller,  director,  or  other  officer  of  any 
bank  or  banking  association." 

How  to  Proceed  in  Absence  of  Three  Directors,  or  of 
both  President  and  Cashier. 

Should  it  ever  happen  that  the  signatures  of  three 
attesting  directors  required  by  law  can  not  be  pro- 
cured within  five  days  after  receipt  of  report  blanks, 
or  should  it  be  impossible  to  obtain  the  signature 
of  either  the  president  or  the  cashier  in  time,  through 
the  absence  or  disability  of  both  these  officers,  all 
that  can  be  done  is  to  make  up  a  temporary  report 
signed  by  some  other  officer,  attested  by  the  signa- 
tures of  as  many  directors  (not  over  three),  as  it  is 
possible  to  obtain,  and  promptly  forward  this  to  the 
Comptroller  within  the  five  days  allowed.  In  such 
cases,  a  letter  explaining  the  circumstances  should 
always  accompany  the  report,  and  a  complete  re- 
port, inade  up  in  all  respects  as  required  by  law, 
should  be  forwarded  to  him  at  the  earliest  possible 
day  thereafter 

Penalty  for  Delay  in  Forwarding  Reports. 

It  will  be  observed  that  section  5213  prescri1)es  a 
penalty  of  $100  a  day  for  each  da3'''s  delay  beyond 
the  period  named  for  forwarding  reports  of  condition, 


88  HAND-BOOK   FOR   BANK   OFFICERS. 

and  for  this  reason  particular  care  should  be  taken 
to  forward  these  reports  to  the  Comptroller's  office 
"within  five  days  after  the  receipt  of  a  request  or 
requisition  therefor  from  him;"  that  is,  within  five 
days  after  the  date  upon  which  the  "call"  and  re- 
port blanks  are  received  by  the  bank. 


MATTERS   OF   MANAGEMENT  AND   POLICY.  89 


CHAPTER   X. 


MATTERS  OF  MANAGEMENT  AND  POLICY. 

Overdrafts. 

The  practice  of  allowing  customer's  accounts  to 
be  overdrawn  is  one  that  pretty  generally  prevails 
in  the  banking  business  without  reference  to  local- 
ity, and  so  long  as  a  due  regard  to  the  security  of 
such  overdrafts  is  had,  the  policy  of  allowing  them 
is  not  necessarily  attended  with  danger.  It  is  a 
privilege,  however,  that  may  very  readily  be  abused 
by  the  customers  of  a  bank,  unless  great  care  and 
prudence  is  exercised  by  its  officers,  and  undue 
laxity  on  the  part  of  one  bank  is  very  apt  to  induce 
its  competitor  to  pursue  a  similar  course  through 
fear  of  losing  business. 

In  certain  portions  of  the  countr}^  and  at  certain 
periods  of  the  year — notably  in  the  South  and 
West — the  rapid  marketing  of  the  great  crops  of 
cotton,  wheat,  corn,  etc.,  creates  conditions  under 
which  overdrafts  are  for  a  season  practically  un- 


90  HAND-BOOK    FOR   BANK    OF^FICERS. 

avoidable,  and  under  such  circumstances  it  is  only 
necessary  that  the  bank  should  look  carefully  to 
securing  itself  for  these  temporary  loans,  by  ware- 
house or  elevator  receipts,  or  bills  of  lading,  further 
protected  by  fire  or  marine  insurance,  in  order  to 
eliminate  from  the  practice  the  chief  elements  of 
danger.  Whenever  it  is  practicable  to  do  so,  demand 
notes  for  the  average  amount  of  accommodation 
granted  in  this  manner  should  be  taken,  and,  of 
course,  interest  should  always  be  charged  for  the 
use  of  money  loaned  in  this  way. 

In  reporting  overdrafts  in  statements  of  condition 
to  the  Comptroller,  the  amount  of  same  should  not 
be  deducted  from  "  deposits  "  so  as  to  decrease  liabili- 
ties shown  under  this  item  in  the  report,  but  entered 
as  an  item  of  "resources."  In  classifying  them  in 
schedule  on  back  of  report,  the  "  secured"  should  be 
separated  from  the  "unsecured,"  and  in  s;^ating 
amounts  "standing"  for  certain  periods  of  time 
named  in  the  schedule,  only  overdrafts  that  have 
been  continuously  standing  at  fixed  amounts  for 
the  periods  named,  without  any  change  in  the 
accounts  in  which  they  appear  should  be  stated  as 
"standing." 


MATTERS   OP   MANAGEMENT   AND   POLICY.  9I 

Renewing  Paper  by  noting  Payment  of  Interest  on 
Same. 

With  some  banks  it  is  the  custom  to  renew  paper 
at  maturity  by  simply  noting  or  indorsing  the  pay- 
ment of  interest  on  it.  The  distance  at  which  the 
customers  of  a  bank  live  from  it  in  some  localities, 
the  inconvenience  the}^  would  undergo  in  coming 
personally  to  renew  their  notes  at  maturity,  and 
other  circumstances,  make  this  course  necessary 
in  such  cases,  and  sometimes  desirable;  but  care 
should  always  be  taken  by  the  bank  to  see  that  no 
claim  on  any  indorser  or  suret}^  on  the  paper  is 
forfeited  by  failure  to  give  such  indorser  or  surety 
proper  and  full  notice,  by  protest  or  ether  means, 
of  its  non-payment  at  maturity,  and  this  precaution 
should  be  always  taken  when  paper  becomes  over- 
due, whether  interest  is  paid  at  maturit}-  or  not. 

In  extending  paper  by  pa3nnent  of  interest,  a  full 
memorandum  should  be  noted  on  it,  in  ink,  of  the 
amount  of  interest  paid,  the  date  on  which  it  is 
paid,  and  the  period  of  time  for  which  it  is  agreed 
to  extend  it,  so  that  these  data  may  show  the  basis 
of  the  new  transaction. 

Renewal  of  Discounted  Commercial  Paper. 

It  sometimes  occurs  that  paper  originally  dis- 
counted by   a  bank   as   "commercial   or  business 


92  HAND-BOOK    I^OR    BANK   OFFICERS. 

paper  "  is,  at  maturity,  renewed  with  the  mutual 
consent  of  all  parties  concerned.  Unless  the  con- 
ditions warranting  the  discount  of  such  paper  re- 
main practically  unchanged- at  time  of  renewal,  it 
is  a  question  whether  it  does  not  then  become  ac- 
commodation paper,  and  as  a  consequence  subject 
to  the  restrictions^  applying  to  "  money  borrowed." 
Borrowing  Money  on  Certificates  of  Deposit. 

By  the  very  nature  of  the  terms  in  which  it  is 
couched  a  certificate  of  deposit  evidences  that  a 
deposit  of  money  has  been  made  with  the  bank 
issuing  the  certificate  prior  to  its  issue,  and  it 
would  seem  proper  and  good  banking  practice, 
therefore,  to  confine  the  use  of  these  certificates  to 
this  legitimate  function,  and  that  they  should  not 
be  used  in  the  stead  of  promissory  notes  for  bor- 
rowing money,  especially  in  cases  where  the  money 
is  not  actually  received  by  the  bank  until  after  the 
certificate  of  deposit  has  been  issued. 

It  may  be  well  to  note  here  that  certificates  of 
deposit — which  after  a  customary  form  bear  interest 
if  the  deposit  remains  for  a  certain  stipulated  period 
of  time— are  in  effect  </^;;2^/2^  certificates,  for  by  waiv- 
ing the  claim  to  interest  the  holder  of  such  a  certificate 
may  demand  payment  of  the  deposit  at  any  time. 

These  should  not  be  confounded  with  time  cer- 
tificates, under  the  terms  of  which  the  holder  has 
no  right  to  demand  payment  except  at  the  expira- 
tion of  the  period  of  time  named  in  the  certificate. 


DIGEST  OF   NATIONAI,   BANK   CASES.  93 


CHAPTER  XI. 


DIGEST  OF  NATIONAL  BANK  CASES. 

Commencing  with  the  year  1875  each  annual 
report  of  the  Comptroller  of  the  Currency  has  con- 
tained a  digest  of  court  decisions  in  cases  concern- 
ing National  banks,  and  this  digest,  which  has 
carefully  been  revised  and  added  to  from  time  to 
time,  has  now  grown  to  be  a  very  valuable  feature 
of  these  reports. 

In  it  the  salient  points  in  each  case  are  stated 
as  briefly  and  concisely  as  possible,  conveniently 
arranged  for  reference,  under  the  following 
general  heads,  taken  from  the  index  of  contents 
appearing  on  pages  8y  and  88  of  volume  I, 
Comptroller's  report  for  1889: 

I.  Constitutional  law;  2.  Powers  and  liabilities  of  National  bank- 
ing associations;  3.  Ultra  vires;  4.  Stock;  5.  Shareholders;  6.  Offi- 
cers; 7.  Interest;  8.  Insolvent  associations;  g.  Receivers;  10.  Taxation; 
II.  Jurisdiction;   12.   Suits;   13.   Evidence;   14.   Crimes. 

The  decisions  therein  cited  occupy  twenty-five 
pages  of  the  report  (89  to  113  inclusive)  and  fur- 
nish a  most  reliable  and  convenient  fund  of  iiifor- 


94  HAND-BOOK    FOR   BANK   OFFICERS. 

matioii  to  the  bank  officer  or  attorney  in  many 
questions  presenting  doubt  or  difficulty.  A  copy 
of  the  Comptroller's  report  is  sent  eacli  year  to 
every  National  bank,  and  one  may  be  had  free, 
upon  application,  by  any  one  in  need  of  the  infor- 
mation it  contains. 

In  addition  to  this  digest  just  described,  "A 
Digest  of  Recent  Decisions  in  Banking  Law"  is 
also  to  be  found  in  the  1888  report,  on  pages  127  to 
138.  This  digest  will  be  found  to  contain  much 
valuable  and  interesting  matter  of  a  general  nature, 
on  the  topics  of  "Banks  and  Banking,"  "Bank 
Officers,"  and  "Business." 

To  the  banker  or  bank  attorney  who  desires  a 
standard  work,  however,  embracing  the  law  and 
usage  relating  to  the  banking  business  in  all  its 
phases,  the  work  of"  Morse  on  Banks  and  Banking," 
third  edition,  by  Parsons,  can  not  be  too  highly 
recommended.  It  is  full  and  complete  on  ever}'' 
branch  of  the  subject,  and  is  recognized  everywhere 
as  a  standard  authority. 


THE   PRESIDENT.  95 


CHAPTER   XII. 


THE   PRESIDENT. 

His  Powers  and  Duties. 

Section  5150  prescribes  that  "  one  of  the  directors, 
to  be  chosen  by  the  board,  shall  be  the  president  of 
the  board,"  and,  although  the  law  does  not  in  terms 
so  prescribe,  this  director,  in  practice,  is  the  presi- 
dent of  the  bank  also. 

In  the  index  of  the  National-bank  Act,  edition 
of  1888,  will  be  found  reference  to  all  portions  of 
this  act  which  specifically  define  what  the  president 

should  do  and  should  not  do;  and  these  statutory 
requirements  apply  also  in  nearly  every  particular 
to  the  cashier  of  a  National  bank. 

Besides  these  statutory  requirements,  the  by-laws 
of  National  banks,  prescribed  by  the  directors,  gen- 
erally make  the  president  "responsible  for  all  such 
sums  of  money  and  property  of  every  kind  as  may 
be  intrusted  to  his  care  or  placed  in  his  hands  by 
the  board  of  directors,  or  b}'  the  cashier,  or  other- 
wise come  into  his  hands  as  president,"  and  pre- 
scribe further  that  "all  contracts,  checks,  drafts, 
etc.,  and  all  receipts  for  circulating  notes  received 


96  HAND-BOOK    FOR    BANK    OFFICERS. 

from  tlie    Comptroller  of  the   Currency  sliall  be 
signed  by  the  president  or  cashier." 

In  this  connection  it  may  be  noted  that  the 
general  form  of  by-laws  for  National  banks  usually 
provides  as  to  the  "conveyance  of  real  estate^^  as 
follows : 

All  transfers  and  conveyances  shall  be  made  by  the  bank 
and  under  the  seal  thereof,  in  accordance  with  the  orders  of 
the  board,  and  shall  be  signed  by  the  president  or  cashier. 

From  this,  it  is  clear  that  neither  the  president 
nor  the  cashier  is  competent  to  transfer  or  convey 
real  estate^  which  is  the  property  of  the  bank,  to 
any  other  party  unless  specially  authorized  to  do 
so  by  order  of  the  board  of  directors.    . 

It  is  customary  for  the  president  to  sign  the  min- 
utes of  all  business  meetings  (which  should  also  be 
attested  by  the  cashier)  and  also  (with  the  cashier) 
to  sign  all  certificates  of  stock  issued. 

Be3^ond  the  duties  here  enumerated,  and  such 
others  as  may  be  specially  delegated  to  him  by  the 
board,  the  authorit}^  of  the  president  does  not  gen- 
erally exceed  that  of  any  other  director,  although, 
as  he  usually  receives  a  regular  salary  for  his 
services,  he  is  expected  to  devote  more  of  his  time 
to  the  supervision  of  the  business  of  the  bank. 


THE  PRESIDENT.  97 

The  Vice-President— Powers  and  Duties. 

As  to  the  powers  and  duties  of  the  vice-preside7tt^ 
the  articles  of  association  usually  prescribe  that  the 
board  of  directors  "shall  have  power  to  elect  a  vice- 
president,  who  shall  also  be  a  member  of  the  board 
of  directors,  and  who  shall  be  authorized,  in  the  ab- 
sence or  inability  of  the  president  from  any  cause, 
to  perform  all  acts  and  duties  pertaining  to  the 
office  of  president,  except  such  as  the  president 
only  is  authorized  by  law  to  perform." 

The  signing  of  circulating  notes  is  the  only  act 
that  the  vice-president  is  specially  authorized  by 
law  to  perform,  and  he  is  not  therefore  legally 
qualified  to  act  in  the  place  of  the  president  in 
performing  any  other  act  prescribed  by  statutes 
for  the  president. 


98  HAND-BOOK    FOR   BANK    OFFICERS. 


CHAPTER  XIII. 


THE  CASHIER. 

His  Powers  and  Duties. 

By  long-established  usage  the  cashier  of  a  bank 
is  regarded  by  all  concerned  as  its  chief  executive 
officer,  whose  duty  it  is  to  see  that  the  policy  and 
plans  formulated  by  the  directors — ^who  are  the 
responsible  managers — are  properly  carried  into 
execution. 

As  the  success  and  welfare  of  every  banking 
institution  necessarily  depends  in  large  measure 
upon  the  ability,  integrity,  and  skill  of  its  cashier, 
it  is  important  that  this  officer  should  have  a  clear 
comprehension  of  the  responsibilities  devolving  on 
him  and  the  powers  with  which  he  is  invested  for 
the  proper  discharge  of  his  duties. 

Much  of  what  is  contained  in  this  chapter  will 
apply  to  the  cashier  of  any  commercial  bank,  but 
the  duties  of  the  cashier  of  a  National  bank,  which 
are  here  specially  considered,  may  properly  be 
divided  into  two  classes,  as  follows: 


THE    CASHIER.  99 

1 .  Those  which  are  distinctly  defined  by  the  National-bank 
Act. 

2.  Those  which  are  inherent  in  his  office,  whether  pre- 
scribed by  law  or  delegated  to  him  by  the  directors,  who 
appoint  him ;  being  such  as  by  well-established  usage  he  is 
expected  to  perform  by  virtue  of  his  office. 

As  to  the  duties  of  the  first  class  above  named, 
reference  to  all  of  these  may  be  found  in  the  index 
of  the  National-bank  Act,  edition  of  1888,  on  page 
91.  The  duties  which  he  is  by  law  required  to 
perform  consist,  chiefly,  of  the  verification  of  va- 
rious reports  and  certificates  under  oath,  and  the 
signing  of  circulating  notes,  and  certain  statutory 
restrictions  also  prohibit  his  performing  acts  which 
would  be  either  dishonest  or  injurious  to  the  in- 
terests of  all  concerned. 

In  this  connection  it  is  to  be  noted  that  wherever 
the  statute  specifically  prescribes  that  an  instru- 
ment is  to  be  signed  by  the  cashier  or  the  president, 
no  other  officer  of  the  bank  is  legally  qualified  to 
sign  in  the  place  of  either  of  these  officers. 

Particular  attention  is  directed  to  the  require- 
ment with  regard  to  the  certification  of  checks. 
Section  5208  makes  it  "unlawful  for  any  officer, 
clerk  or  agent  of  any  National  banking  association 
to  certify  any  check  drawn  upon  the  association 


lOO  HAND-BOOK    FOR    BANK    OFFICERS. 

unless  the  person  or  company  drawing  the  check 
has  on  deposit  with  the  association  at  the  time  such 
check  is  certified  an  amount  of  money  equal  to  the 
amount  specified  in  such  check,"  and  further  pre- 
scribes that  while  "any  check  so  certified  by  duly 
authorized  of&cers  shall  be  a  good  and  valid  obliga- 
tion against  the  association,"  its  certification  by  any 
ofiicer,  clerk,  or  agent  would  subject  the  association 
to  the  penalty  of  being  placed  in  the  hands  of  a 
receiver  by  the  Comptroller. 

Apparently  to  correct  abuses  in  this  respect,  Sec- 
tion 13,  act  July  12,  1882,  was  afterwards  enacted, 
which  makes  the  officer,  clerk,  or  agent  wilfully  over- 
certifying  a  check  personally  liable,  on  conviction, 
to  severe  penalties  of  fine  and  imprisonment.  This 
section  is  more  explicit  in  its  terms  than  Section 
5208,  and  prescribes  penalties  for  anj^  officer,  clerk, 
or  agent  who  shall  wilfully  violate  Section  5208, 
"  or  who  shall  resort  to  any  device,  or  receive  any 
fictitious  obligation,  direct  or  collateral,  in  order  to 
evade  the  provisions  thereof,  or  who  shall  certify 
checks  before  the  amount  thereof  shall  have  been 
regularly  entered  to  the  credit  of  the  dealer  upon 
the  books  of  the  banking  association." 

The  second  class  embraces  a  wide  range  of  duties, 


The  cashier.  ioi 

the  chief  of  wliicli  perhaps  are  embodied  in  the  fol- 
lowing extracts  from  a  general  form  for  by-laws 
usually  adopted  by  the  directors  of  associations  at 
time  of  organization,  viz.: 

Under  the  caption  of  "Officers"  section  7  of  this 
form  prescribes  that  "  the  cashier  *  *  '^  shall 
be  responsible  for  all  the  moneys,  funds,  and  val- 
uables of  the  bank  "  ;  and  under  the  caption  "  Con- 
tracts" section  21  prescribes  that  "all  contracts, 
checks,  drafts,  etc.,  and  all  receipts  for  circulating 
notes  received  from  the  Comptroller  of  the  Cur- 
rency shall  be  signed  by  the  (president  or)  cashier." 

These  practically  commit  to  the  cashier's  safe 
keeping  and  control  all  the  negotiable  personal 
property  of  the  bank  and  confer  upon  him  certain 
included  powers  necessary  to  the  proper  discharge 
of  the  responsible  functions  of  his  office. 

Such,  for  instance,  are  the  giving  of  certificates 
of  deposit,  cashier's  checks  and  other  vouchers  for 
money  or  valuables  intrusted  to  the  safe  keeping 
of  the  bank ;  the  certification  of  checks ;  the  signing 
of  checks  and  drafts  for  the  purpose  of  transferring 
the  funds  of  the  bank  from  one  place  to  another, 
or  for  paying  its  current  expenses  or  other  obliga- 
tions ;  the  buying  and  selling  of  exchange,  coin  and 


I02  HAND-BOOK    FOR    BANK   OFFICERS. 

bullion  where  this  is  a  part  of  the  bank's  regular 
business.  The  cashier  also  has  the  power  to  in- 
dorse paper  intrusted  to  the  bank  for  collection, 
and  upon  receipt  of  money  in  payment  of  contracts 
to  indorse  and  deliver  paper  and  collateral  security 
representing  the  same ;  but  he  has  no  inherent  right 
to  indorse  non-negotiable  paper,  or  to  compromise  a 
debt  to  the  bank,  or  change  the  terms  of  an  original 
contract  without  express  authorit}^  from  the  board  of 
directors.  Of  course  he  has  no  right  in  his  official 
capacity  to  indorse  his  own  individual  paper. 

In  cases  of  emergency  he  may,  for  the  purpose 
of  meeting  the  obligations  of  the  bank,  rediscount 
negotiable  paper  or  pledge  negotiable  securities 
in  order  to  borrow  money,  and  even  execute  a 
promissory  note  for  this  purpose;  but  he  is  not 
empowered  to  borrow  money  continuously  and 
habitually  for  the  purpose  of  providing  additional 
capital  in  this  way.  As  a  rule,  however,  it  is  better 
that  all  borrowings  by  the  bank  should  be  made 
with  the  knowledge  and  under  the  express  instruc- 
tions of  the  board  of  directors. 

It  is  within  the  power  of  the  directors  to  limit 
these  powers  of  the  cashier;  but  in  case  he  exer- 
cised them  in   spite  of  such  restrictions  his  acts 


THE    CASHIER.  103 

would  bind  the  bank  to  outside  parties  who  were 
without  notice  of  such  limitations  to  powers  ordi- 
narily inherent  in  the  cashier. 

In  this  connection,  the  following  extract  from  the 
decision  of  the  U.  S.  Supreme  Court  in  Merchants' 
Bank  vs.  State  Bank  (lo  Wall.,  649),  defining  in 
general  terms  the  authority  of  the  cashier,  will  be 
found  valuable  and  interestinsf: 


■^t) 


The  question  we  are  now  considering  is  the  authority  of 
the  cashier.  It  is  his  duty  to  receive  all  the  funds  which 
come  into  the  bank,  and  to  enter  them  upon  its  books.  The 
authority  to  receive  implies  and  carries  with  it  authority  to 
give  certificates  of  deposit  and  other  proper  vouchers.  Where 
the  money  is  in  the  bank  he  has  the  same  authority  to  certify 
a  check  to  be  good,  charge  the  amount  to  the  drawer,  appro- 
priate it  to  the  payment  of  the  check,  and  make  the  proper 
entry  on  the  books  of  the  bank.  This  he  is  authorized  to  do 
virtute  officii.     The  power  is  inherent  in  the  office. 

The  cashier  is  the  executive  officer,  through  whom  the 
whole  financial  operations  of  the  bank  are  conducted.  He 
receives  and  pays  out  its  moneys,  collects  and  paj'S  its  debts, 
and  receives  and  transfers  its  commercial  securities.  Tellers 
and  other  subordinate  officers  maybe  appointed,  but  they  are 
under  his  direction,  and  are,  as  it  were,  the  arms  by  which 
designated  portions  of  his  various  functions  are  discharged. 
A  teller  may  be  clothed  with  the  power  to  certify  checks,  but 
this  in  itself  would  not  affect  the  right  of  the  cashier  to  do 
the  same  thing.  The  directors  may  limit  his  authority  as 
they  deem  proper,  but  this  would  not  affect  those  to  whom 
the  limitation  was  unknown. 


I04  HAND-BOOK    FOR    BANK    OFFICERS. 

As  chief  executive  officer,  the  cashier  ordinarily 
conducts  the  correspondence  of  the  bank  and  super- 
vises the  subordinate  officers  and  clerks  in  their 
duties  of  receiving  and  paying  money  and  keeping 
the  books  and  accounts.  He  also  sees  that  proper 
notices  of  meetings  are  sent  to  shareholders  and 
directors  and  that  the  necessar}^  minutes  of  such 
meetings  are  properly  recorded,  to  be  afterwards 
signed  by  the  president  and  attested  by  himself. 
It  is  customary,  too,  for  the  cashier  (and  the  presi- 
dent) to  sign  all  certificates  of  stock  issued  by  the 
bank. 

In  conclusion,  it  may  be  said  that  while  the 
cashier  has  no  pow.er  to  shape  or  direct  the  policy 
of  the  bank's  business,  it  is  his  duty  to  see  that  all 
the  details  of  such  polic}^ — not  inconsistent  with 
law — as  the  directors  may  adopt,  are  carried  out 
with  the  utmost  faithfulness,  diligence,  and  skill. 


GENERAL   REMARKS.  1 05 


CHAPTER  XIV. 


.GENERAlv  REMARKS,  IN  CONCEUSION,  REGARD- 
ING THE   NATIONAL   BANK   SYSTEM. 

In  the  preparation  and  compilation  of  this  work 
certain  conclusions  have  forced  themselves  upon 
the  mind  of  the  author,  which  he  ventures  to  em- 
body with  the  work,  and  to  give  for  what  they  may 
be  worth. 

By  requiring  the  maintenance  of  a  "  lawful- 
money "  reserve  upon  deposits,  imposing  upon  the 
banks  restrictions  in  the  matters  of  real  estate 
transactions,  and  holding  their  own  stock,  and  in 
failing  to  grant  them  the  power  to  deal  in  stocks 
and  bonds,  it  would  appear  that  the  framers  of  the 
law,  in  the  light  of  past  experience,  aimed  to  create 
a  banking  S3\stem,  the  resources  of  which  should, 
in  convertibility  and  activity  resemble  the  blood 
circulating  through  a  healthy  human  bod}',  and  to 
prevent  the  clogging  of  its  arteries  and  veins  with 
impediments  which  tended  to  produce  financial 
torpor,  disease,  and  death.  How  wisel}'  these  law- 
makers builded  is  attested  by  the  existence  to-day 


Io6  HAND-BOOK    FOR    BANK    OFFICERS. 

of  over  3,300  banks  iu  active  operation.  The  splen- 
did success  so  far  attained  by  National  banks,  as  a 
whole,  is  the  best  evidence  of  the  integrity  and 
ability  of  those  who  have  been  charged  with  their 
management,  and  should  stimulate  officers  of  newly 
organized  banks  to  emulate  the  fair  dealing,  pru- 
dence, and  conscientious  desire  to  act  within  the 
law,  which,  to  a  striking  degree,  characterize  Na- 
tional-bank officers  as  a  class. 

In  effect,  the  law  has  operated,  as  was  intended, 
to  make  National  banks  distinctively  banks  of  de- 
posit and  discount,  and  as  such  they  have  taken 
root,  grown  up,  and  flourished  wherever  the  en- 
vironment has  been  favorable  to  such  growth. 
Whenever  a  National  bank  is  organized  or  operated 
for  the  purpose  of  speculating  in  real  estate,  dealing 
in  stocks  and  bonds,  or  for  other  illegal  purposes, 
the  promoters  will  sooner  or  later  be  compelled  to 
yield  unwilling  compliance  to  the  law,  or  to  accept 
the  alternative  of  voluntary  or  involuntary  liqui- 
dation. 

The  great  confidence  reposed  by  the  general 
public  in  National  banks  is  based  mainly  upon  the 
knowledge  that  they  are  held  to  a  strict  account- 
ability to    the    law  by  means    of  intelligent   and 


GENERAL   REMARKS.  I07 

tliorough  governmental  supervision,  and  whenever 
a  charter  conferring  this  great  advantage  is  ac- 
cepted by  the  managers  of  a  bank,  they  should  also 
in  good  faith  accept  whatever  apparent  disad- 
vantages are  imposed  by  the  law  under  which  the 
charter  is  granted. 

The  circulation  feature,  which  for  a  time  when 
bonds  were  low  in  price  and  interest  rates  were  high, 
was  very  profitable,  and  which  must  in  time  nec- 
essarily disappear  on  redemption  of  the  bonds  upon 
which  this  circulation  is  issued,  has  now  become, 
to  a  great  extent,  a  mere  incident  of  the  system, 
and  where  rates  of  interest  are  high — as  in  the 
West  and  South — operates  to  prevent  its  natural 
growth,  because,  under  these  circumstances,  the  en- 
forced investment  of  capital  in  high-priced  bonds 
inflicts  actual  loss  of  profit  on  the  margin  invested. 

Various  plans  for  removing  this  obstacle  to  the 
growth  of  the  system  have  been  proposed  from  time 
to  time,  but  so  far  no  action  in  this  direction  has 
been  taken  by  Congress.  It  is  more  than  jDrobable, 
however,  that  a  solution  of  the  difficulty  for  the 
present,  at  least,  will  be  found  in  the  course  rec- 
ommended by  the  Comptroller,  viz.,  a  reduction 
in  the  minimum  bond  deposit  limit  fixed  by  the 
law  as  it  now  stands. 


UNIVERSITY  OF  CALIFORNIA  AT  LOS  ANGELES 

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